House lawmakers are trying to remove an obstacle that mortgage providers complain is keeping them from helping more borrowers avoid foreclosure.

Reps. Paul Kanjorski (D-Pa.) and Mike Castle (R-Del.) reintroduced legislation on Tuesday that would shield banks and other financial institutions that service mortgages from being sued by investors for renegotiating loans.

“I think it’s in the best interests of at-risk homeowners and investors to work out payment terms that give a homeowner financial stability and the investor some return for their investment,” Castle said. “Without this legislation, I am concerned that lawsuits could bring modifications to a halt.”

In recent years, the bulk of sub-prime mortgages were repackaged as securities and resold to investors, severing the tie between the borrower and the lender that originated the loan.

With the collapse of the housing market, lawmakers and the Bush administration have put pressure on loan servicers to modify millions of loans. Yet the threat of investor lawsuits has slowed their progress, even though investors may risk even lower returns through foreclosure of the properties backing their loans.  

The Bush administration last week touted the completion of more than 1 million loan modifications under a program with lenders it launched in December. But foreclosures still hit their highest level on record in the fourth quarter of 2007, raising alarm about the pace of such loan “workouts.”

The Kanjorski-Castle legislation requires loan servicers to maximize returns for mortgage investors in the aggregate. If the servicers modify loans — say, by freezing the rate, reducing the rate or extending the life of the mortgage — they must show that they “reasonably believe” the change will benefit the investors in the pool of mortgages as a whole.

The legislation is a tweaked version of legislation that Castle had introduced on his own last fall. It would apply only to mortgages on homes that are occupied by the owners, and only those loan workout plans begun before 2011.

Supporters of the bill, including House Financial Services Chairman Barney Frank (D-Mass.), believe the legislation will greatly reduce the risk of lawsuits, therefore encouraging loan servicers to modify more loans.

In a statement congratulating his colleagues on the bill, Frank said he hoped the legislation would be considered with other legislation that he is drafting to stem foreclosures.

“I believe this is the direction we should be moving, and given the newness of the issues, no one should have a closed mind about this,” he added.

However, investors in securitized mortgages worry that imposing a new duty on loan services will negate or complicate the contracts they have already negotiated.

“Changing this standard would alter the commercial expectations of investors and could undermine the confidence of investors in the sanctity of agreements, which are central to the process of securitization,” testified the deputy executive director of the American Securitiz­ation Forum, Tom Deutsch, to the Financial Services Committee in December.

But the concerns of investors and securitizers may have relaxed since then due to changes by Castle and Kanjorski that made the legislation more targeted. Both sit on the Financial Services subcommittee on capital markets, which Kanjorski chairs.

The top lobbyist for the Securities Industry and Financial Markets Association, Scott DeFife, held off Wednesday from commenting on the bill, and said he was reviewing it with his group’s members.