March 3 (Bloomberg) -- Mortgage “cram-down” legislation that stalled in Congress last week will require homeowners to exhaust all options before they could use bankruptcy to reduce their loan payments, according to a summary of the revamped bill.

The House of Representatives may vote as early as March 5 on the amended legislation, which would let federal judges lengthen loan terms, cut principal payments and reduce interest rates for borrowers in Chapter 13 bankruptcy protection, House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today.

Democratic leaders, who had pulled the bill from consideration, embraced an alternative plan pushed by the New Democrat Coalition, which calls itself a group of moderate lawmakers. The bill would require borrowers to seek loan modifications from their banks before they could qualify to amend their mortgage terms through bankruptcy protection.

“Some may think the changes made to the bill go too far while others will contend that they do not go far enough,” said a letter sent to their colleagues by three California Democrats who sponsored the changes, Representatives Zoe Lofgren, Dennis Cardoza and Ellen Tauscher. “Given the ever-deepening housing crisis, however, we ask you to place such differences aside as we have done and support this effort.”

Under the compromise, bankruptcy judges would have the discretion to decide whether banks had offered a “qualified loan modification” that would bar borrowers from cramming down their mortgage in bankruptcy, according to an e-mailed summary of changes being circulated by Democratic staff.

‘Heinous Practice’

“The banks have got to stop falling on the ball and start answering their phones,” Tauscher said in an interview last week. “We need to get these qualified loan modification programs up and running.”

Loan modification that actually raises a borrower’s monthly payments is a “heinous practice” that may not qualify as a modification under the legislation, Tauscher said. Regulators would be given discretion to define what qualifies.

Borrowers would also need to certify that they’ve provided their income, expenses and debts to the mortgage holder.

Judges would be required to use federal appraisal guidelines to calculate home values to determine whether a loan is “under water,” which is when the mortgage balance owed exceeds the property’s worth. To qualify, the loan must be unaffordable to the borrower, not just under water, according to the summary. Borrowers would also need to share a portion of the price gains with lenders if the house is sold during the bankruptcy plan, according to the summary.

‘An Added Burden’

Republicans including Representative Lamar Smith of Texas say the plan will force responsible borrowers to subsidize other people’s mistakes.

“American families and homeowners are already hard pressed with their own financial responsibilities,” Smith wrote in a letter today to Treasury Secretary Timothy Geithner. “Giving irresponsible borrowers a bankruptcy bailout at the expense of responsible homeowners is simply an added burden and another bill to pay.”

Housing and Urban Development Secretary Shaun Donovan briefed House Democrats today on how the bill fits into President Barack Obama’s broader housing plan. The administration is scheduled to release more details of its mortgage rescue plan tomorrow.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.

Last Updated: March 3, 2009 19:54 EST