For the 1 million Americans who filed for personal bankruptcy in 2008, more than 580,000 of them held mortgages. 2 weeks ago, Citigroup made a bold move to allow bankruptcy judges to modify their customer’s mortgages in bankruptcy court. This move flies in the face of conventional mortgage loan modification, but is a positive step towards mitigating foreclosure proceedings for honest hard-working homeowners. Given time and money, this move can allow hundreds of thousands of homeowners to remain in their homes, reducing poverty and homelessness.

Traditionally, homeowners have to seek loan modification outside of bankruptcy court before they file. It was pure luck whether or not a bank wanted to work with their customers. In the era of adjustable-rate mortgages, most banks did not care to work with their consumers and reclaimed homes as assets. As a result, many consumer rights advocates demanded legislation to protect the consumer and force banks to modify loans for honest customers trying to maintain their investment.

For many of these homeowners, foreclosure led to their bankruptcy as they struggled to pay rising mortgage costs and fees. In mid 2008, the HOPE for Homeowners program was a Congress-led initiative to bring relief to struggling homeowners. The HOPE program allowed homeowners to adjust the principal they owe and reduce their payments into a fixed rate conventional mortgage. The HOPE for Homeowners program lacked one important thing: it did not force lenders to modify loans. In fact, lenders had a choice if they even wanted to use the HOPE for Homeowners program and inform their customers if they qualified.

As a result, only 400 applications for HOPE have been used. The initial goal was 400,000 applications. Only 1% of lenders agreed to use the program and work with consumers to save their homes. The rest of the banks decided to take a risk and repossess the lost property. The mortgage crisis deepened, and the risk those banks bet on cost them dearly. So much that they vied for “bailout” funds to stay afloat.

Citigroup was one of the banks that adamantly fought against government intervention on home loan modification. On January 9, after receiving over $45 billion in bailout money, Citigroup changed its tune and agreed to allow judges to change home loans in bankruptcy court. Banking lobbyists claim the move will make home loans more expensive and risky for banks, since judges will usually side with the consumer and allow major modifications. Consumer groups are proud of the move, recognizing the government is finally forcing banks to work with their customers and prevent homelessness.

For more information, see: MSNBC