Bank of America officials have reportedly gotten behind a plan to create a Federal Homeownership Preservation Corp. that would buy billions in mortgages that might otherwise end up in foreclosure.

In a proposal to congressional lawmakers, BofA officials warn that up to $739 billion in mortgages are at risk of default in the next five years, and that the government intervention is needed, the New York Times reported.

BofA is backing a proposal by Sen. Chris Dodd, D-Conn., to create a government-chartered corporation that would buy up troubled mortgages from lenders and investors at a discount, and move homeowners into 30-year fixed-rate mortgages backed by Fannie Mae, Freddie Mac or the Federal Housing Administration (FHA).

As envisioned by Dodd, the Federal Homeownership Preservation Corp. would need $10 billion to $20 billion in startup capital, and then be self-sustaining. Dodd maintains such an effort would not constitute a bailout of lenders and investors, because only those willing to take a “haircut” and sell their loans at a discount would be eligible to participate (see Inman News story).

In their proposal to lawmakers, BofA officials warned that “any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the Times reported. A BofA spokesman did not respond to a request for comment by press time.

Moody’s last week estimated that nearly 8.8 million homeowners owe more on their mortgages than their homes are worth. As home-price declines put more homeowners upside down, the Bush administration may now be willing to explore rescue options. Treasury Department officials are scheduled to meet with lending industry executives this week, the Times reported.

Last week the director of the Office of Thrift Supervision said OTS is looking at creating negative-equity certificates that would allow upside-down borrowers to refinance into more affordable loans. Borrowers would be able to take out FHA-backed loans to repay part of their principal, with the balance of the loan converted into a certificate that the original lender could cash in if the home is later sold for more than its assessed value at refinancing.

Congress is also weighing bills that would allow bankruptcy judges to “cram down” loan modifications over the objections of lenders to help troubled borrowers in their homes (see story).

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