Mortgage cramdowns could slam banks' balance sheets

Will the "cramdown" provisions of President Barack Obama's plan hurt banks even as they help beleaguered homeowners?

Among the steps Obama outlined during a news conference in Phoenix during which he unveiled his new housing plan is a provision that would let bankruptcy judges reduce the principal outstanding on a homeowner's mortgage as a way to lower monthly payments. That could really help people who are 'under water', or owe more to their lender than their house is worth. But it could be very bad news for banks and others who have invested in securities backed by mortgages.

Bad bets on mortgage-backed securities are already contributing to banks' woes. Many financial institutions reaped fat profits during the housing boom by packaging mortgages into bonds and collateralized debt obligations. When the bubble burst, a lot of banks were still carrying tons of these investments on their balance sheets. As foreclosures began to spike, they had to take massive losses and set aside additional capital.