WASHINGTON (Reuters) - New legislation that would facilitate the buying up of distressed mortgages with the help of the Federal Housing Administration (FHA) was unveiled yesterday by a key House Democrat.

Seeking to combat sharply rising home foreclosure rates, House Financial Services Committee chairman Barney Frank said in a statement that his bill would allow the FHA "to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders".

In a draft, which he warned could change, the Massachusetts Democrat said his bill could refinance between one and two million distressed home loans by letting the FHA offer up to $300 billion in new loan guarantees.

It would also provide $10 billion in loans and grants to states to buy and fix distressed properties.

Frank said that, under his programme, an existing lender or mortgage holder that agrees to write down the principal of a troubled loan could get "a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay".

"The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower."

Under the programme, he said, borrowers or loan servicers could contact an FHA-approved lender, who would then determine the size of a loan that would fit programme requirements and that the borrower could reasonably repay.

"If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the programme and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage," he said.

Several approaches are circulating in Congress to deal with falling home prices, rising foreclosures and slumping activity in credit markets. But no substantive action was expected until after lawmakers return from a spring recess that begins today. Congress is scheduled to reconvene in early April.

Frank was expected to give further details at a news conference yesterday, along with Senate Banking Committee chairman Christopher Dodd. The Connecticut Democrat has proposed a plan to let the government buy up distressed loans.