Sterling Financial Corp. of Spokane is offering special mortgage rates to help people buy homes — and heal its own loan portfolio.

The main goal of the program is to spur home sales in real estate developments funded by the $12.8 billion-asset company. This helps the home builders that put up those developments repay their Sterling loans, staving off further credit deterioration for the lender, said Nancy McDaniel, an executive vice president and chief portfolio manager at Sterling Savings Bank.

Sterling Savings, the company's commercial subsidiary, is offering the promotion in conjunction with the company's thrift unit, Golf Savings Bank. In cases where a home builder has already defaulted on a development loan, Sterling can also make mortgages for bank-owned properties to help recoup its losses.

"This will accelerate the movement of all residential construction loans off of our balance sheet," McDaniel said.

The promotion also sends a strong signal to the public that Sterling is using part of the $303 million it has received from the Treasury Department's Capital Purchase Program to step up consumer lending.

"We're using the CPP to enable people to become homeowners in our region, and we're making positive impressions on the community," McDaniel said.

Sterling is one of a handful of companies around the country that are marketing discount mortgages to would-be homeowners as a way to minimize the number of nonperforming construction and development loans on their books or to lower the amount of potential writeoffs within such projects.

Brett Rabatin, an analyst at Sterne, Agee & Leach Inc., said the strategy is "underutilized."

"Banks have to find a way to move all those homes, particularly if the builders run out of liquidity," Rabatin said. "These kinds of programs can help turn nonperforming assets into earning assets, and they are also a way to show they're making loans to consumers to stimulate the economy."

Sterling offers aspiring homebuyers a choice of two special mortgages: a below-market rate of 3.875% for a conventional mortgage, or a 3% contribution, up to $20,000, to pay closing costs, prepay or buy down the rate of their mortgage. The buy-down option can be used for conventional mortgages, jumbo loans or loans backed by either the Federal Housing Administration or the Department of Veterans Affairs.

The two Sterling subsidiaries are offering the mortgage deals for homes in projects financed by Sterling Savings throughout the Pacific Northwest. The subsidiaries recently started running newspaper ads in larger markets such as Seattle, Portland and Spokane, and McDaniel said the "phones are ringing off the hook."

Another company seeking to attract homebuyers with special mortgage deals is Umpqua Holdings Corp. of Portland, Ore. Umpqua, which has received $214 million in government capital, is offering mortgages to prospective condominium buyers in one of more than a dozen projects that its bank has financed in Oregon, Washington and California.

Unlike Sterling, the $8.6 billion-asset Umpqua is not offering below-market mortgage rates. But Ron Stroble, an executive vice president and mortgage division manager for Umpqua Bank, said the program still benefits its home-builder borrowers by stimulating property sales, helping commercial customers repay their construction and development loans.

"If we didn't do this, the condos probably aren't going to sell," Stroble said. "There are very few options for borrowers out there on those" properties.

At the end of 2008 Umpqua had nonperforming assets of $161.3 million, or 1.88% of its total assets. About 70% of its nonperformers were residential development loans.

Timothy Coffey, an analyst at FIG Partners LLC, said many banks are leery of offering cut-rate mortgages on homes in development projects they have financed, fearing that making below-market loans could hurt margins.

Still, banks plagued with nonperforming residential construction and development loans ought to consider the strategy, Coffey said. "Banks should weigh the pros and cons of eating some margin compression if it lowers credit costs down the road," he said.

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