A Virginia investment firm that had agreed to buy control of the troubled Steed Mortgage Co. to save it from bankruptcy has backed away from the deal because conditions of the agreement weren't met, Steed's president said yesterday.

But Bill Steed said the mortgage company and several area banks have worked out arrangements to allow the company to continue in business at approximately one-quarter of its former size and to make good more than $1 million in real estate settlement checks the company had bounced.

A lawyer for Union First, the bank that apparently has led efforts to keep the mortgage company alive, said talks are continuing among area banks owed money by Steed and Steed's representatives, and that funding might be available from several sources to get Steed through its crisis.

That crisis began in October when Steed's checks for financing some 40 real estate transactions bounced and the company closed most of its offices and laid off most of its employes.

"Just about everything is nailed down, but it's not 100 percent nailed down," said Steed. "I think we'll finally get these people (whose checks from Steed bounced) squared away and I'll finally be able to get a good night's sleep."

Steed said the company expects to make the checks good by Dec. 19 and continue substantially reduced operations with money from bank loans, the sale of some of Steed's assets and a frozen account at Suburban Trust Bank.

Steed said the company's agreement to sell loan servicing rights (which represent future income) was critical to getting the banks to extend credit. He also said that Union First had agreed to buy out Suburban Trust's position as a creditor in order to unlock accounts frozen there.

Those arrangements would be sufficient to keep Steed in business until February when the company expects enough income from the bond market to cover the debt the company is taking on now, he said. "Then we're on our own as a very small company," said Steed.

Instead of closing approximately $20 million in loans a month as Steed previously did as the third largest mortgage company in the area, the firm will close about $3.5 million to $5 million worth of loans a month, Steed said. "The company will be reduced by about 75 percent, but that's better than 100 percent," he added.

The investment firm that backed away is B&C International, which is headed by two Iranian-born brothers. B&C had agreed to cover the bad checks in exchange for control of the company. Among other things, that agreement was conditional on home buyers and sellers involved in interrupted transactions promising not to sue Steed.

"Most of the releases came in," Steed said. "One or two were troublesome." He said he wasn't sure whether the failure to obtain all the releases or general concerns about the business climate prompted B&C to withdraw from the deal. Steed said he received a letter from B&C early last week informing him of the decision.

Steed said he expects the checks for some settlements to be made good this week, with the balance to be taken care of Dec. 19. He said he would ask people involved in the transactions for releases at the time of settlement.

In instances where Steed had agreed to finance houses at the lower VA and FHA rates previously in effect but where the deals had not gone to settlement, Steed will finance the houses at the rates now in effect but will waive a one percent fee that buyers normally pay at settlement, he said.