March 5 (Bloomberg) -- Legislation letting judges reduce the mortgage payments of borrowers in bankruptcy passed the House of Representatives, overcoming opposition from industry groups and Republicans who say the bill may further destabilize lending.

The so-called cram-down bill, approved 234-191, also permanently increases the Federal Deposit Insurance Corp.’s coverage of bank deposits to $250,000. The legislation now goes to the U.S. Senate where Democrats may vote on a companion bill as early as next week, said Jim Manley, a spokesman for Majority Leader Harry Reid of Nevada.

Democratic leaders had pulled the measure from consideration last week amid opposition from industry organizations including the American Bankers Association. Stricter provisions were added at the urging of a group of self-described moderate lawmakers called the New Democrat Coalition, including a requirement that borrowers seek loan modifications from their mortgage companies before they could qualify to amend terms through bankruptcy.

“This bill’s not perfect, but the process has worked better than anyone expected,” Representative Ellen Tauscher, a California Democrat and chairwoman of the New Democrat Coalition, said in a speech on the House floor today. “Over the last couple of weeks we’ve worked together to make improvements to make sure bankruptcy is an option of last resort.”

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

Last Updated: March 5, 2009 18:18 EST