When Jimmie and Cynthia Bellamy filed for bankruptcy to stave off the foreclosure of their Bridgeport, Conn., house last spring, they discovered some shocking news.

The reappraisal of the property, a customary procedure in a bankruptcy case, revealed that their home of five years, on which they owed about $146,000, was now worth $126,500.

The Bellamys had become another victim of the Northeast's collapse of real estate values, said Ira Charmoy, the couple's bankruptcy attorney.

To secure some relief for his clients, Charmoy employed a legal tactic that until 15 months ago was rarely used in personal bankruptcy cases. In oral arguments last month, he asked the bankruptcy judge to reduce the amount of mortgage debt the Bellamys owed to the current value of the collateral, a procedure referred to in the legal community as a "cramdown."

No ruling has been issued in the case, which was filed in the federal bankruptcy court for the Connecticut district.

The residential lending industry, which could lose millions of dollars because of this practice, is fighting the use of the tactic in various court cases and is seeking federal legislation to curtail the practice. If they fail, industry officials said, lenders will have little choice but to raise the cost of mortgages or make them more difficult to obtain.

Many lenders could not survive if mortgages held in their portfolios were "written down 20 percent to 30 percent," said William E. Cumberland, general counsel for the Mortgage Bankers Association of America.

Loans sold by lenders to a secondary mortgage intermediary, which pools the mortgages to be resold as securities, represent much the same problem, he said. Lenders said they cannot afford to buy many mortgages that have undergone a cramdown.

Although only a handful of cramdown challenges have been mounted since an Oregon court blessed the first major residential real estate cramdown in October 1989, the lending industry is worried that losses resulting from such rulings could soar.

Although cramdown dispositions of commercial real estate and installment debt are common, the mortgage on a residential property until recently was considered "sacrosanct," said Lawrence Avery Young, a Houston bankruptcy lawyer and chairman of the American Bar Association's consumer bankruptcy committee.

The 1989 Oregon federal court case, however, set off a "new wave on the bankruptcy ocean," Young said.

So far, residential cramdowns have occurred in the markets that have already experienced real estate value reversals -- Alaska, the Southwest and now the Northeast. However, Cumberland said, the problem appears destined to spread throughout the country, including the Washington area, as the recession worsens.

The Federal Home Loan Mortgage Corp. (Freddie Mac), a powerful secondary mortgage market player, has chosen to make a test case out of the Bellamy matter to force the Supreme Court to eventually consider the issue, said Freddie Mac associate general counsel Dean Cooper.

Freddie Mac became a party to the case by buying the Bellamys' mortgage from the original lender. The loan was pooled with other home loans and the package sold as a security to investors. As the intermediary, Freddie Mac must make up any shortfalls in the timely payment of principal and interest to the security holder.

The Mortgage Bankers Association of America, a trade group representing 2,600 lenders, also plans to enter the fray by filing a friend of the court brief in an as-yet-undetermined case, Cumberland said.

The lender group has drafted federal legislation to eliminate cramdowns and is seeking congressional sponsors to introduce the bill, Michael J. Ferrell, chief lobbyist for the association.

Congressional attention is required, because "there is a real conflict of interest between Congress encouraging the borrowing consumer to have a fresh start {through the federal bankruptcy code} and in the interest of Congress in having public policy that encourages homeownership," Cumberland said

Under a cramdown, the court splits the mortgage debt into two parts. The amount of debt in excess of the property's current value becomes an unsecured claim.

Depending upon the three- to five-year workout plan agreed to by the bankruptcy court, the unsecured amount is usually not repaid in full. The court may forgive the debt entirely or allow the borrower to pay it back at a discount of as little as 10 cents on the dollar.

The amount of debt equal to the value of the property is treated as a secured claim that the borrower must continue to pay.

Under some cramdown interpretations, the borrower must continue making the originally scheduled monthly payments, even though the secured debt has become lower. Consequently, the borrower's immediate financial burden remains unchanged, although the mortgage will ultimately be paid off sooner.

In its brief on the Bellamy case, Freddie Mac argued that a cramdown "deprives the residential mortgage lender of its rights without contributing to the 'fresh start' objective of the bankruptcy code."

Without a cramdown, however, bankruptcy attorney Young said, the borrower cannot sell the property for enough to satisfy the original debt.

Charmoy, for his part, is convinced that borrowers should not have to sell their homes to benefit from a cramdown. He said he argued on the Bellamys' behalf that the court should lower the monthly payment sufficiently to amortize the lower secured mortgage amount over the original loan term as part of a cramdown ruling.