A crucial bank loan to build 23 townhomes on a dilapidated North Side thoroughfare has fallen through, forcing the project’s founders to scramble for another lender.The long-delayed first phase of the Federal Hill townhouses was set to begin in late May or early June until lender Fifth Third Bank yanked its promise of a $3.16 million loan. The $5.7 million project was conceived by the Central Northside Neighborhood Council and partner S&A Homes.

“I was really shocked when I heard that the bank had pulled out because it is a really good deal for them,” said Robert Iseman, S&A’s new home sales manager. “But I don’t think it’s going to be an issue, we’re still shooting to break ground at the same time.”

Not everyone is so certain.

“There’s a lot of confusion right now because we don’t know what’s been lost,” said Randy Zotter, a longtime member of the neighborhood group and a candidate for a seat on the 15-member governing council.Zotter questioned why Michael Barber, CNNC’s executive director, portrayed the Federal Hill project as “going along well” during an April membership meeting even though Fifth Third Bank had pulled 55 percent of the first phase’s funding.

Barber said financing should not be a problem.

“At this point, we are very close to securing a construction loan commitment and have indications of strong appetite for lending in general,” he said in a statement.

The council’s April newsletter states six homes — priced from $130,000 to $230,000 — are expected to be completed by November. It suggests people interested in receiving special financing, such as deferred mortgages, to apply for pre-sale contracts by April 23.

“The membership wants to know why they haven’t heard about (the problem),” Zotter said. He said he wants to be sure the homes will be ready by November for anyone who started the financing process. Three applicants have, so far.

Joan Kimmel, a CNNC board member, said members weren’t told about Fifth Third’s withdrawal “because two other banks were immediately interested.”

Any delay would be minimal, she said. The neighborhood council is pursuing a loan from Mellon Bank or Dollar Bank, Kimmel said.

The Pennsylvania Housing Agency might be willing to fill the gap, as well, said Bob Bobincheck, the agency’s planning and policy director. The agency committed a prepaid loan of $1.8 million to Federal Hill.

Lenders, such as Fifth Third Bank, often retract loans because of unfavorable financial market conditions and not because of a failing on the project manager’s part, said Howard B. Slaughter Jr., CEO of Landmarks Community Capital Corp. and a former Pittsburgh region director for mortgage industry giant Fannie Mae.

“Right now many lenders are looking very closely at all the credits that they are considering approving,” Slaughter said. “We know what’s happening with the housing market (downturn), and it means that there is more scrutiny.”

Federal Hill might have been particularly exposed to turmoil in the financial market because the groundbreaking has been delayed since 2006, giving lenders more time to change their minds. The project plan says it eventually will offer 60 three-bedroom townhomes ranging in size from 1,430 to 2,350 square feet.

“I’m optimistic,” said Tom Cummings, housing director of the Urban Redevelopment Authority. “If they can get started by July, they can have the homes built in five or six months.”

The URA has contributed a $670,319 loan and $730,000 grant.

Separately, the authority will provide up to $470,000 in various levels of deferred mortgages to some would-be buyers. The URA’s board could soon vote on $1.1 million in road and sewer line improvements in the Federal Hill area.

The project has been aided by liens the city agreed to forgive on some of the land. Pittsburgh inexpensively repurchased 11,000 liens in late 2006 with the intention of forgiving ones where developers might build.

“It is really going to bring affordability to city living,” Iseman said of Federal Hill.

North Side residents said they believe the Federal Hill project is critical to attracting developers to improve an area once considered off-limits when the X-rated Garden Theatre was operating.

There are other promising signs. The Carnegie Library of Pittsburgh will break ground on a building during a May 9 ceremony at 1210 Federal St.