Defying veto threats from President Bush, the House approved the measure by a vote of 266-154, with 39 Republicans - mostly from areas suffering worst from housing woes - supporting it.
It would let the Federal Housing Administration take on up to $300 billion in new mortgages so that financially strapped borrowers facing foreclosure could refinance.
The plan by Rep. Barney Frank, D-Mass., is the centerpiece of a broader package of bills approved Thursday that Democrats say will prevent more foreclosures and help homeowners and communities deal with the fallout from the mortgage meltdown.
"We are in a recession, and the major cause of that is the subprime crisis," said Frank, the House Financial Services Committee chairman. "Diminishing the number of foreclosures is in the interest not simply of those who will avoid foreclosure, but people in their neighborhood, (in) the cities in which they are located, and the whole economy."
The measure is targeted at homeowners facing default, including many who owe more than their houses are worth.
For instance, a homeowner who owes $290,000 on a house now worth $225,000 could refinance into an FHA-backed loan if the mortgage holder was willing to take a loss of about 36 percent. The borrower's monthly mortgage payments would fall from $2,200 to about $1,200.
Loan holders would have an incentive to participate, proponents believe, since the alternative would be costly foreclosures, which can involve losses of 50 percent or more.
Supporters hope the package - which awaits action in the Senate - will serve as the basis for a broad bipartisan housing compromise that could satisfy both parties' keen appetite for delivering election-year aid to anxious constituents.
But Bush's veto warnings, bolstered by staunch GOP opposition, are clouding its prospects.
"House Democrats passed bills that they know will never become law. Most Americans understand that we shouldn't create a taxpayer-funded bailout for lenders and speculators," said Tony Fratto, a White House spokesman.
Republicans argued the package reward lenders and irresponsible borrowers at the expense of homeowners and renters who made more prudent choices and are straining to cover their costs in a punishing economic climate.
"The vast majority of Americans who find themselves struggling with mortgage payments, struggling with high gas prices, struggling with high food crises are now going to assume responsibility for ill-advised financial decisions and misjudgments of other people," said Rep. Spencer Bachus, R-Ala.
Under Frank's plan, homeowners currently considered too risky to qualify could refinance into FHA-backed loans if their lenders agreed to take substantial losses on the original mortgages. Borrowers would have to show they could afford to make payments on the new loans. They would have to share with FHA at least half of their proceeds if they profited from selling or refinancing again.
The plan is projected to cost $2.7 billion over the next five years.
Republican backers said they were putting aside their philosophical objections to a government-based rescue due to the severity of the housing crisis that has hit their constituents.
"There are 500,000 real families with children out there who are going to be helped by this," said Ric Keller, R-Fla. "It may not be a perfect bill, but good people in my home state of Florida need help, and in my view, this is the only train leaving the station."
Indeed, with a legislative schedule squeezed by the November elections, Congress has just a couple of months to come to terms with the White House on a housing package. Sen. Christopher J. Dodd, D-Conn., the Banking Committee chairman, has been searching for an elusive bipartisan deal on a similar measure, which he hopes his panel can vote on next week.
The House on Thursday also passed, 239-188 a bill to send $15 billion to states to buy and fix up foreclosed property. Bush has also threatened to veto that measure, contending it rewards the very lenders who helped caused the housing chaos and could act as an incentive for them to foreclose rather than find ways to help struggling borrowers stay in their homes.
Proponents say it will prevent blight in neighborhoods plagued by abandoned, foreclosed homes.
Democrats, seeking Republican broad support for Frank's housing plan, also added a grab-bag of measures Bush has sought.
Those included legislation to overhaul the FHA, to more tightly regulate government-sponsored mortgage giants Fannie Mae and Freddie Mac, and authority for state and local housing finance agencies to use tax-exempt bonds to refinance distressed subprime mortgages.
They also attached a housing tax credit of up to $7,500 for first-time home-buyers, to be paid back over 15 years.
The package permanently raises the limit on the size of loans FHA could insure and Fannie Mae and Freddie Mac could buy to $729,750 in the highest-cost housing markets. Those caps are scheduled to fall at the end of the year, to $362,790 for the FHA, and to $417,000 for Fannie Mae and Freddie Mac.