House approves mortgage bankruptcy overhaul

By Kevin Drawbaugh

WASHINGTON (Reuters) - The U.S. House of Representatives approved a bill on Thursday to let bankruptcy judges reduce the primary residence mortgage debt of homeowners going through bankruptcy proceedings as a last resort to avoid foreclosure.

Seen by Democratic supporters as vital to stabilizing the crumbling U.S. real estate market, the so-called "cramdown" bill has been opposed by bankers, despite amendments to limit its scope, including one restricting it to existing mortgages.

The Senate was expected to consider its own version of the House bill soon, but chances of passage are uncertain.

The House vote tally was 234-191.

Under present law, bankruptcy courts may reduce many forms of debt for struggling borrowers -- including a boat, car, vacation home or family farm -- but not a primary residence.

Bankers say changing bankruptcy law to allow this would raise costs for everyone by diverting capital from the mortgage debt market. But Democrats backing the bill say it could sharply cut the high U.S. home foreclosure rate.

About one in eight U.S. homeowners with mortgages, a record share, ended 2008 behind on payments or are in the foreclosure process, a mortgage industry group reported on Thursday.

President Barack Obama on Wednesday launched a $75 billion foreclosure relief plan, part of a $275 billion housing stimulus program announced last month. (Reporting by Kevin Drawbaugh; Editing by Bernard Orr)