U.S. mortgage bond investors are crying foul as federal policy responses to the worst housing crisis since the 1930s threaten to cripple their tenuous positions.

The Obama administration has strengthened its drive to halt foreclosures, which lawmakers, banks and investors agree are a cancer on the economy. But the fixes in place, or pending in legislation, are structured to benefit big banks at investors' expense, according to reports by Amherst Securities Group.

Legislation that would allow bankruptcy judges to rewrite mortgages includes a controversial provision that would protect mortgage servicing companies such as Bank of America Corp and Wells Fargo & Co from lawsuits if they break mortgage contracts, putting them at odds with investors who view legal protections as a key way to help them extract the highest possible return from their assets.

Incentives for servicing companies to restructure mortgages under President Barack Obama's Housing Affordability and Stability Plan (HASP) are also seen as an affront to investors who feel powerless against the momentum building to help homeowners and banks.

I think the Obama administration has made a deliberate choice to favor homeowners over investors, said Whitney Tilson, founder of New York-based hedge fund T2 Partners LLC, which in December began buying distressed mortgage bonds.

The conflict between mortgage servicers and investors is perhaps most egregious since incentives to modify primary mortgages could perversely boost the value of home equity loans, most of which are owned by servicer banks, Amherst analysts, led by Laurie Goodman, wrote in reports.

Getting a homeowner current on a loan by lowering interest rates or forgiving principal could cause greater losses for investors owning bonds backed by the mortgages. The second-lien loans held in portfolios of these servicer banks are left clearly in a stronger position, they said.

The top four servicer banks -- Bank of America, Wells Fargo, JPMorgan Chase & Co and Citigroup Inc -- own $441 billion of home equity loans and home equity lines of credit, according to the latest Amherst analysis.

The value of their mortgage servicing businesses would rise dramatically, too, enhancing the conflict, they said.

Proponents of more liberal modifications argue that bondholders fail to see that they are at greater risk if homeowners are left to default, and go into foreclosure. With banks desperate to unload foreclosed homes, properties are often sold at below-market prices.

Modifying mortgages can help both first- and second-lien holders, Bank of America said in an e-mail.

The HASP plan does nothing to benefit the second lien beyond attempting to provide a framework that allows the first lien to perform and get paid, perhaps allowing the second lien holder to get paid at some time in the future, it said.

Spokesmen at JPMorgan Chase, Wells Fargo and Citigroup declined to comment.

Investors say it is ironic that they are shouldering costs of foreclosure prevention as the Obama administration is asking them to put their money to work in the mortgage market, and restart securitizations that have greased the flow of consumer credit. And handing first-liens any loss ahead of second-liens turns a basic law of investment on its head, they said.

The legislation that would allow bankruptcy judges to rewrite mortgages, known as cramdown legislation, has been opposed by many banks and investors who worry the intrinsic value of contracts would be diminished. The House of Representatives has passed the bill.

Accelerating the recognition of losses in a bankruptcy cramdown would also reduce the value of bonds.

If the contractual rights of bondholders are altered by the state to give one group of investors an advantage over another then we really see the end of investing as we know it, said Paul Isherwood, chief executive officer at Winston Capital, a Denver-based hedge fund.

Bank of America-owned Countrywide is facing a lawsuit from investors demanding the bank buy every mortgage for which it agrees to reduce payments under a predatory lending deal struck with state attorneys general. The complaint asserts that Countrywide will shift $8.4 billion in modification costs to mortgage trusts, harming bond investors.

Such litigation has been cited by servicers as a top hurdle to loan modifications that are being pushed by lawmakers and regulators to halt foreclosures, which are fueling a vicious cycle of home price drops and defaults.

The entire (bankruptcy cramdown) bill is showing that the United States is a country that will alter contracts when it is politically expedient to do so, said Bill Frey, president of Greenwich, Connecticut-based Greenwich Financial Services, which is leading the lawsuit against Countrywide.

(Editing by Leslie Adler)