Citigroup yesterday became the first major bank to endorse a law that would allow bankruptcy judges to revise mortgage terms, including reducing principal balances.

Currently, while judges can restructure car loans and credit card debt, they are legally prohibited from restructuring mortgages. In the past several months, the lending industry has vehemently opposed any changes to the current law. Mortgage lenders have argued that they if judges could revise mortgage terms the loans would become more expensive for everyone, and loans would be eliminated all together for riskier borrowers.

Citigroup’s about face no doubt was at least partially driven by the fact that the financial behemoth has received billions in federal bailout funds, and congressional democrats have been putting pressure on Citi to back the law.

Citi qualified its support by saying the law should only apply to loans made prior to the laws passing.

WHAT DOES THIS MEAN FOR YOU?

The law has not yet been passed, and therefore has no current impact on you. However, the law is quickly gaining momentum. Last month, the law was also backed by the National Association of Home Builders, which also had previously opposed the law.

If the law were passed, bankruptcy could provide immediate relief to distressed homeowners. Moreover, the threat of bankruptcy could force lenders to modify more loans more quickly.