Citi backs mortgage relief plan

US bank Citigroup has agreed to support a proposed change in US bankruptcy law to help troubled mortgage borrowers avoid losing their homes.

The controversial change, known as "cramdown", would let courts wipe out some mortgage debts.

The legal reform would help "millions of families save their homes", said US lawmakers who proposed the measure.

Opponents say giving bankruptcy judges the power to erase mortgage debt would increase costs for future homeowners.

A similar proposal failed to win approval last year amid stiff opposition from Republicans and some Democrats, as well as banking and housing industry lobbyists because of the possible impact on future borrowers.

'Bankers supportive'

However, with a recession under way and the housing market in crisis, Democratic lawmakers say that Citigroup has become the first major bank to back the reform.

"This is a breakthrough. Foreclosure is the cause of our economic problems and we have got to address that," said Democratic Senator Christopher Dodd, chairman of the Senate's banking committee.

Democratic Senator Charles Schumer said his office had contacted banking officials across the country and some said they would be supportive.

"Citigroup's support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly," he said.

A spokesman for Citigroup, one of the US's largest mortgage lenders, declined to comment officially.

In the US, most forms of personal debt, such as holiday homes and family farms, can be restructured in bankruptcy. But a mortgage on somebody's main residence cannot.

Under the terms of this proposed reform, only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment.

Homeowners would have to certify that they had tried to contact their lender before filing for bankruptcy.

The National Association of Home Builders has dropped its opposition to the reform and the National Association of Realtors, which has largely stood aside, is debating whether to support reform.

The government has injected billions of dollars in taxpayer funds into Citigroup since October, making the nation's third-largest bank a top recipient of federal bail-out money.