The courts continue to smile on financially distressed homeowners seeking to reduce mortgage obligations, with two more rulings going in their favor.

Faced with the threat of foreclosure and other financial difficulties, the homeowners in both cases filed for bankruptcy and, as part of the workout plan, asked the courts to reduce their mortgage debt to the current value of their properties, a procedure often referred to as a "cramdown."

In both instances, the value of the homes in question had fallen below the amount owed by the homeowners, although cramdowns have also occurred in cases where the property was incorrectly appraised for more than it was worth.

Under a cramdown, a court splits the mortgage debt into two parts. The amount of debt equal to the current value is treated as a secured claim that the borrower must continue to pay.

The amount of debt in excess of the current value then becomes an unsecured claim, which is usually not repaid in full. Unsecured creditors commonly receive only 10 cents on the dollar.

Late last month, a federal appeals court stripped down a $50,000 mortgage to the $30,000 present value of an Oklahoma City mobile home owned by Danny L. and Joanne E. Hart.

In another ruling a week earlier, a bankruptcy judge in Connecticut deducted about $25,000 off from $153,340 mortgage Jimmie and Cynthia Bellamy were paying on the Bridgeport, Conn., home they bought nearly four years ago.

The Bellamy case could also eventually forge another breakthrough for homeowners.

A cramdown affords no immediate financial relief to the borrower, who must continue to make the originally scheduled monthly payments. In the long run, however, the loan will pay off sooner. In the short term, the only financial benefit to the borrower depends on selling the house, which likely would yield only enough money to pay off the lower cramdown mortgage amount.

The judge in the Bellamy case has yet to decide whether to lower the Bellamys' monthly payment by amortizing the lower mortgage amount over the remaining 26 years of the original loan term. That issue was set aside until the couple files a workout plan for its creditors, said Ira Charmoy, the Bellamys' lawyer.

The cramdown victory "does not mean anything to the Bellamys right now unless we get the payments reduced," he said.

Although lenders have lost the most significant cramdown cases so far, they continue to argue that cramdowns are illegal because Congress intended to protect mortgages for primary residences from such treatment when it wrote the bankruptcy code.

That protected status, said William E. Cumberland, general counsel for the Mortgage Bankers Association of America, arises out of Congress's desire to encourage homeownership though federally backed programs requiring little or no down payment.

"These are loans where any drop in the economy is going to result in a mortgage that is in excess of the current value of property," Cumberland said.

In effect, he said, Congress is balancing the interest of "a lot of prospective home buyers against the interest of home buyers who had that chance, did not make it" and now are seeking a fresh start under the bankruptcy code.

However, the trend among courts to side with homeowners does not bode well for lenders, legal experts said.

The Hart decision makes the 10th Circuit the third U.S. appeals court to recognize the use of cramdowns to benefit borrowers filing for bankruptcy.

In a Pennsylvania case, the Third Circuit, and in an Oregon case, the Ninth Circuit also ruled against lenders.

Agreement among several of the country's 13 appellate court circuits, with each representing a different part of the country, often leads to a "snowball" effect when the other circuits consider the same issue, said Sandy L. Schovanec, one of the attorneys representing the lenders in the Hart case.

Every homeowner victory also reduces the chances of lenders to appeal the issue up to the Supreme Court.

The Supreme Court generally does not take a case unless there is a clash among the appellate courts, said David Light, editor of Bankruptcy Court Decisions, a publication based in Horsham, Pa.

As a result, some observers now say the lending community's best shot at short-circuiting cramdowns is to persuade Congress to clarify the protected status of mortgages under the bankruptcy law.

The Federal National Mortgage Association (Fannie Mae), a secondary mortgage market company, said it remains optimistic, however, that the lending community will ultimately prevail.

Fannie Mae plans to join in a friend-of-the-court brief if the lender in the Hart case succeeds in winning its requested retrial of the matter, according to Thomas Ducey, Fannie Mae's director of loan servicing and lender standards.

"We are not discouraged by the individual cases going against {lenders} nor do we feel there is a momentum developing in favor of {borrowers} being able to do cramdowns," Ducey said, adding that some lower court cases have gone in the lender's favor.

The defendant in the Bellamy case, the Federal Home Loan Mortgage Corp. (Freddie Mac), has targeted the case as its best shot at eventually winning Supreme Court review of the issue, although the matter has not yet reached the appellate level.

As a secondary mortgage market company, Freddie Mac became involved in 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.

Freddie Mac associate general counsel Dean S. Cooper said he was "disappointed" with the court's decision, but said that his company remains "unquestionably" committed to taking the matter to the Supreme Court and has already filed an appeal in this case.

If cramdown decisions become the norm, Cooper said, it could eventually "reduce the availability of home mortgages."

However, Henry J. Sommer, an attorney with Community Legal Services, a firm serving Philadelphia's low-income population, took issue with Cooper's claim.

"Cramdowns have been going on for years and it has not affected the mortgage market," he said. "To hurt the credit markets there would have to be a real serious deflation in property values across the country."

Sommer said he believes the real reason lenders are fighting cramdowns is because they cannot collect mortgage insurance for the unsecured portion of the loan.

Lenders, Sommer said, would prefer to foreclose on a home and sell it, although that nets them no more money than a cramdown would. However, mortgage insurers -- including the Federal Housing Administration, the Department of Veterans Affairs and private companies -- will pay claims for any financial shortfalls resulting from foreclosures and not cramdowns, he said.