Steed Mortgage Co., the Washington area's third-largest mortgage company, has told area home buyers and sellers it won't release the money it owes them unless they promise not to sue the company for more than $1 million worth of bad checks the firm issued them earlier, it was learned yesterday.

The company sent letters asking for the legal releases last weekend to buyers, sellers, brokers and others involved in 40 transactons that fell apart when the checks bounced.

The releases are a condition imposed by investors who agreed to pump $1.6 million into the firm to save it, the letter said.

Some home buyers who have been living in houses they may or may not own and others caught in the tangle of Steed's misfortunes, yesterday called the company's demand "blackmail" and "economic coercion."

But Bill Steed, president of the company, called it the only option for a firm that has been teetering on the edge of bankruptcy for several weeks and said the company will be forced to close if people don't agree to the releases. Most of Steed's offices have been closed and 100 of its 130 employes have been laid off.

Steed narrowly escaped bankruptcy earlier this month when B&C International, a Virginia company directed by two Iranian-born brothers, agreed to cover the bad checks in exchange for control of the company.

A condition of that rescue was that Steed secure releases from liability for damages from people whose sales transactions were interrupted, Steed said.

"If people aren't interested in the lower interest rates and lower points, they'll just have to sue us," Steed said. "If the company goes under, they won't get their money."

"The people have to make a choice the same way I did," Steed said. He said he reluctantly sold control to the Virginia company after "the banks pushed us to the wall in withdrawing their lines of credit and freezing our operating capital."

"I made my choice based on what was practical, not emotional," Steed said. "It's almost like the fate of Steed Mortgage Co. is in the hands of people I don't know."

Two of those people are a suburban Maryland couple, who asked that their names not be used, who sold their house Oct. 18, only to find later the check Steed issued for the settlement was no good.

The couple had planned to use the money from Steed to pay off the balance of the mortgage on the house they were selling and for part of their downpayment. Financing on the new home they are buying was dependent on the money from Steed being available.

Since the check bounced, the couple has been unable to get the money to the builder of the new house. Even so, the transfer of deeds on the two houses has been recorded, someone has moved into their old house and the couple has moved into the new home.

The builder, unable to pay off a construction loan, said he is losing approximately $53 a day that he pays in interest on that loan.

"Steed is using economic blackmail to try to get us to sign a release," said Mervin Schwedt, an attorney for the couple, "They're dangling this check."

If the couple losed the original loan, Schwedt said, they could be forced to pay a higher interest rate that might price them out of the house.

"We're running up our costs every day, hoping we'll get an answer from Steed," the builder said. "It's economic extortion."

"Wee1re not out for blood," said the suuburban Maryland man, who spent the holiday yesterday painting and putting up storm windows in the house he may not own. "We want to say -- come on, make it good, and we'll fight it out later." o

From the investor's point of view, B&C International's requirement "is not unreasonable," Steed said. "There's no point in these guys putting in their $1.6 million and losing more money, too" through lawsuits, he said.

"Sure people are going to have expenses," Steed said. "I guess the investor is just saying, we're going to do the best we can to make things right."