Massachusetts mortgage business. An overhaul of the state sanitation code is driving lenders and homeowners to distraction, and Bay State banks are reporting drops of up to 25% in rural mortgage lending since the beginning of the year as a result. Under an eight-month-old rewrite of a 1978 state code, the cesspools or septic systems of Massachusetts homes not connected with local sewer systems must be inspected and if necessary upgraded around the time of sale. The law, known as Title V, requires a certificate of inspection - verifying that the septic system meets state standards - up to six months before the sale or within nine months after. The result: Lenders and buyers are increasingly insisting on having the inspection certificate in hand before closing a deal, to protect themselves from problems with the loan or property later. That's causing a lot of headaches for the 650,000 homeowners affected, some of whom have had to pay as much as $40,000 to install new systems. And rather than flush away a chunk of their equity, an increasing number of homeowners are backing out of deals and choosing not to sell, causing the significant drop in lending in rural areas. "It is a great expense, and a lot of the individuals trying to sell the properties do not have enough equity built up to repair the property, sell it, and get some money out of it," said Tina M. Cullina, vice president of Flagship Bank and Trust Co. in Worcester. The problem has been particularly foul in outlying areas surrounding Worcester and in rural bedroom communities of western Massachusetts, where about half of the homes have either septic tanks or some other private method of disposal. On the other hand, the state's cities and the eastern shore near Boston have not been affected as much, because most homes are linked to local sewer systems. Cynthia Merkle, senior vice president of mortgage banking at Lynn-based Eastern Bank Corp., which has an office in Worcester, said there have been "a number" of transactions in which sales agreements were signed and loans were approved, but when the property was inspected for Title V compliance, "the dollar amount to do the upgrade was so high that it prohibited the sale." "It's to the point where people are not selling their homes," she said. Eastern reported a 25% drop in lending since January in the Worcester area, mostly due to Title V problems. On average, rural homeowners have found themselves paying about $15,000 to $25,000 for new systems, while repairs to old systems ranged from a few thousand dollars to as much as $15,000, bankers say. Costs have varied depending on the layout of the property and the location of existing systems. "A number of elderly people are trying to get retirement money out of their home and they're faced with either putting in a new system or fixing a system," Flagship's Ms. Cullina said. "Some of them are shying away from selling for that reason. A lot of them are just sitting tight and waiting and hoping that something will happen to improve the situation." The problem is even spoiling the image of individual towns that don't have sewer systems. Ms. Cullina said she knew of one homeowner outside the Worcestor area who had a buyer for her home but found that she first would have had to pay more than $20,000 to repair her septic system to meet the new standards. The woman opted not to sell, and the buyer went looking in a town with a sewer system. As the winter months set in, homeowners are faced with the added problem that their systems can't be inspected while the ground is frozen or covered in snow. As a result, buyers are insisting on putting their payments into an escrow account until the inspection is completed. "That's probably the biggest issue right now - how to deal with closings in the winter," said David E. Floreen, senior vice president of the Massachusetts Bankers Association. State lawmakers are hoping to respond to concerns with a $30 million to $40 million bond authorization to provide low-interest loans to help property owners upgrade their systems in communities most affected by the Title V regulations. But the legislature adjourned before it could be passed and now any action must wait until January. "It wasn't restrictive enough before, but now it's way too restrictive," said Augie Calheno, senior vice president of lending at Woronoco Savings Bank in Westfield, referring to the state code before and after the March revision. "There has to be some work done to get it to a middle ground where it works for everybody and protects both parties at the same time."

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