WASHINGTON - Millions of Americans with weak credit who took out mortgages the past few years are caught in a tug of war between Wall Street firms, banks and hedge funds.

Who wins the dispute could have more of an effect on how many homeowners get financial help to avert default and foreclosure than anything Congress or regulators are contemplating in the near term.

Washington seems to be taking a wait-and-see approach even as the housing market's woes worsen. Foreclosures are twice what they were two years ago at this time.

Monthly payments on more than 8.4 million adjustable-rate mortgages issued since 2004 will be affected by rising interest rates on reset dates the next few years. Research firm First American CoreLogic predicts $326 billion, or 13 percent, of outstanding loans will default.

Publicly, bank and hedge fund officials say they want to help distressed homeowners. Privately, a debate simmers over whether banks that sold bundled mortgages to institutional investors can legally pull loans from the bundles for workouts to help keep the default rates down.

However, which homeowners get chosen for financial help by lenders might be influenced by billions of dollars in contracts - credit-default swaps - negotiated the past few years between lenders and investors, the hedge funds allege.

Lenders say they have a legal right and want to pull out some distressed loans and rework or reissue them, taking a financial hit if need be, to keep borrowers in their homes.

Hedge funds say the real motive might be to avoid paying what lenders owe on complicated financial contracts negotiated on mortgages.

Instead of having to pay on a contract at as much as 100 times the value of the underlying mortgage, 'it becomes cheaper for some folks to buy worthless loans,' says Harvey Pitt, a former Securities and Exchange Commission chairman who represents a hedge fund.

Unregulated hedge funds effectively assumed some of the risk lenders faced when they issued mortgages to borrowers with risky credit. In turn, lenders agreed to pay hedge fund investors if the value of defaults soared on bundled mortgages sold to institutional investors.

If the value of defaults is below a certain level, hedge funds lose and owe lenders a negotiated amount. Led by Bear Stearns Cos., lenders say banks legally can alter mortgage pools, regardless of whether a default-risk swap is attached.

For homeowners, 'there are real consequences to the failure of these mortgage loans beyond the fact that a lot of rich guys didn't get as rich as they hoped to get,' said Ira Rheingold, executive director of the Washington-based National Association of Consumer Advocates. 'We're talking about homes. We're talking about communities. It's not just a mere economic calculus.'

Tom Morano, global head of mortgages for Bear Stearns, says the firm buys out or modifies mortgages when there is a good chance homeowners will be able to be current on payments. In making adjustments, lenders are within legal rights, he said.