A major provision of the housing-market legislation passed by the House Thursday is getting a lukewarm reception from the mortgage industry.

The measure, which is aimed at reducing foreclosures, would encourage mortgage companies to reduce the principal on troubled loans. In exchange, the Federal Housing Administration would pay off the current loan and issue the borrower a new FHA-backed mortgage. Struggling homeowners would get lower monthly payments to increase chances they could avoid foreclosure.

The latest effort comes as mortgage delinquencies are climbing and other government efforts have come under criticism for doing too little to help most borrowers. Moody's Economy.com estimates that nearly 2.5 million homeowners will lose their homes in 2008 and 2009 because of problems managing their mortgages.

The Congressional Budget Office estimates that the proposal, which would be voluntary for mortgage companies, could help refinance loans for 500,000 borrowers over the next four years.

But trade groups that represent mortgage companies and investors say the provision might not help as many borrowers as some expect. They view the write-down provision as one of several options they might use to assist troubled homeowners. "I don't believe this would be a tool that would be used significantly," said Tom Deutsch, deputy executive director of the American Securitization Forum, which represents mortgage-servicing companies and investors who buy mortgages that have been packaged into securities.

David Kittle, chairman-elect of the Mortgage Bankers Association, said at a conference earlier this week that he sees no rush by mortgage bankers to write down loans.

Mortgage companies that choose to participate in the proposed plan would be required to write down the value of a delinquent loan by 15% from the home's current appraised value. Borrowers would have to be at least 60 days late on their mortgage payments to qualify for the program. The bill excludes investors and those who lied about their income on their loan applications.

Mr. Deutsch says that in most cases, investors who hold mortgage-backed securities would be better off with other alternatives, such as temporarily reducing the borrower's interest rate or extending the term of the loan, in part because those leave open the chance that investors will get a larger return if the borrower gets back on track and home prices rebound. Mortgage companies are more likely to participate in the write-down program if they expect home prices to continue to decline steeply, he notes, increasing the chances of larger losses.

A spokesman for the Financial Services Roundtable, which represents 24 major mortgage lenders and insurers, says the mortgage industry is open to the proposal, but its first choice is to work on loan modifications that conform with the written agreements that govern mortgage securitizations. "A principal reduction is an option, but it's not going to be the absolute preferred option," said Paul Leonard, who represents the roundtable's Housing Policy Council. "I don't think our members would say it shouldn't be considered, but the first option would be to continue to do loan modifications."

Mortgage-servicing companies, which collect a small monthly fee for each loan they handle, have little incentive to put borrowers in this program unless they are "95% certain this borrower is going to default," said Thomas Zimmerman, head of asset-backed and mortgage credit research for UBS AG. Many borrowers who took out loans with little or no documentation are likely to be ineligible because their income was overstated, he adds. Others may fall through the cracks because of difficulties in refinancing loans that have both first and second mortgages.

But mortgage companies may face pressure to use the program. "I want to put the servicers on notice," Rep. Barney Frank (D-Mass.), a co-sponsor of the bill, said at a hearing last month. "If we see a widespread refusal on the part of servicers to cooperate voluntarily in what we see as an important economic problem...they can expect much tougher regulation in the future."

Write to Ruth Simon at ruth.simon@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

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