Chase Buying Mortgage Unit From Mellon

Chase Manhattan Corp. on Wednesday grabbed for the leadership position among home lenders, announcing a deal to buy Mellon Bank Corp.'s mortgage unit.

Terms were not disclosed, but brokers said Mellon Mortgage's $55 billion loan servicing portfolio would be worth $620 million to $900 million, based on recent sales of servicing on conventional mortgage loans at 1.125% to 1.625% of face value.

The acquisition would boost Chase's servicing book to $292 billion. Chase, currently the No. 3 mortgage lender, would surpass Bank of America Corp.'s mortgage unit, which services $273 billion, and Wells Fargo & Co.'s Norwest Mortgage, which has a portfolio of $268 billion, according to National Mortgage News.

The deal, which is expected to close this quarter, would give Chase industry-leading scale in a business where scale is considered critical. For Mellon, it would cap a series of planned divestitures. The company had said it was shedding some businesses and sharpening its focus on investment management.

Aside from Mellon Mortgage's portfolio, Chase would gain a telemarketing center in Denver, servicing centers in Denver, Pittsburgh, and Houston, and retail origination offices in eight states.

Chase's Edison, N.J.-based mortgage banking unit is the top lender this year, having originated $56.4 billion in the first half. Mellon Mortgage has the ability to originate about $4 billion annually.

Goldman, Sachs & Co. represented Mellon. BayView Financial Trading Group, a Miami boutique that specializes in mortgage company mergers and acquisitions, advised Chase.

Mortgage servicers have become fewer and bigger in recent years. The biggest reason: economies of scale. Lenders have sought to feed their servicing portfolios to spread the cost of technology investments over more loans.

Also, "the bigger you get, the more buying power you have with the third-party vendors you do business with," said Steve Rotella, chief operating officer of Chase Manhattan Mortgage Corp.

However, Mr. Rotella said, getting big not only improves efficiencies and lowers costs, but can lead to greater revenues as well.

Chase would pick up 630,000 customers as a result of the deal with Mellon and intends to try to cross-sell other bank products to them, he said.

Mr. Rotella said Chase viewed the planned purchase of Houston-based Mellon Mortgage as a "low-risk" transaction because Chase is already familiar with Mellon's operations.

Last year Chase bought 26 retail mortgage offices in the West from Mellon. The two banks also have a joint shareholder services venture.

While the giants have been expanding, small and medium-size servicers have exited the business, unable to build economies of scale or to stomach the interest rate risk that servicing entails.

Most recently BankAtlantic Bancorp of Fort Lauderdale, Fla., sold off its $3 billion servicing portfolio, following a $15 million writedown in last year's falling interest rate environment.

With rates now rising, servicing is viewed as a more attractive asset- but nevertheless the domain of big sophisticated companies.

Until last year, Mellon was still trying to become a major presence in the mortgage industry.

In 1995, it purchased Metmor Financial, boosting its servicing portfolio by 46%. In April 1998, it made a system conversion that doubled its servicing capacity.

But in January of this year, Mellon announced that it would shed its mortgage unit and several other businesses to focus on mutual funds and investment management.

The bank sold its credit card operation to Citigroup, its transaction processing unit to U.S. Bancorp, and its commercial mortgage servicing business to General Motors Acceptance Corp.

However, it retained its jumbo mortgage business, which markets loans on expensive homes through the bank's Boston Co. unit.

The jumbo business is important to Mellon because such loans, which exceed the conforming limit, fit the needs of its private banking and private asset management customers, a spokesman for the bank said.

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