U.S. House approves bankruptcy-mortgage bill

WASHINGTON - A plan to give debt-strapped homeowners a chance to lower their mortgage payments through Bankruptcy Court won House approval yesterday.

The legislation, part of President Obama's housing-rescue plan, is facing a much tougher road in the Senate amid the same industry opposition and reservations from moderate Democrats that nearly derailed it in the House.

The House passed the bill, 234-191, mostly along party lines, and the Senate could consider it within weeks.

The legislation would give bankruptcy judges - who now can modify loans for such items as cars and student loans but not for primary residences - new power to reduce the interest rate and principal on a mortgage.

Supporters regard the threat of a mortgage modification in bankruptcy as a crucial tool to prod banks to negotiate with homeowners for more affordable terms. Critics argue the measure will create a flood of bankruptcy filings that will drive up mortgage rates and further destabilize the housing market.

The House bill is the product of a compromise between dueling Democratic factions.

The compromise would bar homeowners from getting loan modifications in Bankruptcy Court unless they had first tried to work out a deal with their lenders and have no other way of affording their mortgages.

It also would let judges consider whether the home-loan company had made a reasonable offer to change the terms to those embodied in Obama's housing plan - allowing the homeowner to reduce monthly payments to about one-third of income.