By Kevin Drawbaugh and Patrick Rucker

WASHINGTON (Reuters) - Financial giant Citigroup Inc has agreed to support a controversial rewrite of U.S. bankruptcy law aimed at helping troubled mortgage borrowers avoid foreclosure, lawmakers said on Thursday.

Known as "cramdown," the rewrite would let bankruptcy court judges erase some mortgage debt to help bankrupt homeowners better handle their payments, subject to strict conditions.

The legal reform would help "millions of families save their homes," said senators Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut.

Michigan Democratic Rep. John Conyers has introduced the mortgage bankruptcy measure in the House of Representatives.

Durbin failed to win Senate passage of a similar measure last year amid stiff opposition from Republicans and some Democrats, as well as banking and housing industry lobbyists who said giving bankruptcy judges the power to erase mortgage debt would increase costs for future homeowners.

This time around -- with a recession under way and the housing market in crisis -- Citigroup backs the reform, under conditions, said the senators, who hope to attach their bill to an economic stimulus package taking shape in Washington.

"I hope we can make it part of the economic recovery and reinvestment act that the administration is considering," Durbin said at a briefing with reporters.

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

Today, most forms of personal debt -- including vacation homes and family farms -- can be restructured in bankruptcy. But a mortgage on a primary residence cannot.

Under the terms of the reform as agreed, only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment, the senators said.

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

Only major violations of the "Truth in Lending Act" would invalidate creditor claims on bankruptcy, they said.

Schumer said his office has contacted top bankers nationwide and some said they would be supportive.

Officials at other top banks -- including Wells Fargo, Bank of America, SunTrust and JPMorgan Chase & Co -- were contacted by Reuters but had no comment.

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

The National Association of Home Builders has dropped its opposition to the reform and the National Association of Realtors, which has largely stood aside in the debate, is mulling 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 bailout money.

After the Treasurybought $25 billion in Citigroup preferred shares in October, it purchased another $20 billion a month later and helped guarantee up to $306 billion in risky assets.

(Additional reporting by Diane Bartz, John Poirier, with Dan Wilchins in New York; editing by Carol Bishopric)

Publié le 08 janvier 2009 Copyright © 2009 Reuters