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By Patrick Rucker

WASHINGTON, April 23 (Reuters) - A banking panel of the U.S. House of Representatives endorsed a bill on Wednesday that would encourage mortgage servicers to modify home loans made to distressed borrowers by shielding them from investor lawsuits.

Regulators and policymakers have beseeched mortgage servicing companies to soften loan terms if it will save a borrower from foreclosure. While such modifications are one way to ease the growing mortgage crisis, changing loan terms can leave mortgage service companies open to lawsuits.

"Without this legislation, I am concerned that lawsuits could bring modifications to a halt," Rep. Mike Castle, a sponsor of the legislation, said last week at a hearing before the House Financial Services Committee.

In a separate move on Wednesday, the committee approved giving local communities hardest hit by the loan crisis a cash boost to buy foreclosed homes. The $15 billion in fresh grants and loans would help communities buy up abandoned properties before they damage the livability of neighborhoods.

Earlier this month, the Senate passed a comprehensive spending bill meant to spur the housing market but the initiative is making its way through the House in piecemeal portions like this multi-billion dollar aid plan.

INVESTOR PROTECTIONS

Castle, a Delaware Republican, and Rep. Paul Kanjorski, a Pennsylvania Democrat, have in the last week watered down their legislation after hearing complaints from investor groups.