Is it possible to fix this bug via mod?
http://www.uesp.net/wiki/Oblivion:Feather#Bug

Not just the negative effects of the bug (which I have never noticed and thus I assume have been fixed), but actually display it ingame as the engine actually handles Feather.

I'd be very interested in doing so because it would greatly simplify a mod that changes encumbrance to behave like it does in the latest Spiderweb Software games, if anyone has played them.

I could have sworn that I'd seen a mod fix this before. But no-one knows it?

This is actually a bug in the magic system. Feather works by lowering your current Encumbrance stat, in exactly the same way that "Drain" effects lower your other stats. When the game first applies such an effect, it "adjusts" the magnitude to make sure that the overall value of the stat is not negative. This means that when you cast a spell (or drink a potion / equip an item) with a Feather effect, it's final magnitude cannot be any larger than your current encumbrance. I'm not sure why Bethesda wrote the game this way - I suppose it makes sense for a lot of the other stats.

There is no way for an ordinary mod to "fix"this. You can, however, work around it when creating custom spells by including a 1 second Burden effect with the same magnitude as the Feather effect. The Burden effect will always be applied first, and it acts to circumvent the "no negative values" check. Once it wears off, the Feather effect will have the full intended magnitude.

Alternatively, an OBSE plugin can patch the game's code to fix the problem directly (the http://www.gamesas.com/index.php?/topic/1116501-relz-oblivion-magic-extender-v10 actually does just that).