CORRECTED: Key senator proposes company to buy mortgages

Removes quote marks and rephrases Dodd's comments in third paragraph

By Patrick Rucker

WASHINGTON (Reuters) - The chairman of the U.S. Senate Banking Committee is proposing to set up a government-sponsored company that would buy distressed mortgages in an effort to save Americans from foreclosure.

In a letter to Senate Majority Leader Harry Reid released on Wednesday, Sen. Christopher Dodd said he envisioned an entity with an initial capitalization of $10 billion to $20 billion that would buy troubled mortgages, give them a markdown and pass on the "discounts ... to homeowners in the form of new, lower-balance mortgages."

Mortgage lenders and investors would recognize losses to push the home loan value down to a more affordable level, the Connecticut Democrat said in the letter.

Those new mortgages would either be insured by the Federal Housing Administration or backed by Fannie Mae and Freddie Mac, he said, two government-sponsored enterprises which guarantee mortgages.

"The difference between the old mortgage and the new mortgage would be sufficient, after initial capitalization, to fund the program and cover possible losses," Dodd said in the letter.

The number of mortgages headed toward foreclosure rose to a record rate at the end of last September as millions of marginal borrowers struggle to make payments on home loans that were offered under easy credit terms. Some of Wall Street's largest banks have taken multibillion dollar write-downs as home loans offered through the middle of last year go bad.

"The new mortgages would be new 30-year fixed-rate mortgages, ensuring long-term stability for homeowners and the housing market," Dodd said of his proposal.

During a press conference outlining his legislative agenda, Dodd said the new entity would target "very distressed mortgages... allow us to purchase those here and then be able to then finance them at the discounted rates that would let people stay in their homes."

Dodd mentioned the idea while discussing a federal stimulus package lawmakers are now mulling as a way to boost the national economy. The new entity proposed by Dodd would not "be part of a short-term stimulus package," he said.

(Editing by Andrea Ricci)