With the growth of electronic marketing, will there be a place for brick-and-mortar retail offices in the mortgage company of the future? Chase and Mellon seem to have come down on opposite sides of this issue in a deal announced Tuesday.

The mortgage subsidiary of Chase Manhattan Corp. said it agreed to buy the 26 western retail offices of Mellon Mortgage, a subsidiary of Mellon Bank, Pittsburgh.

For Chase, one of the largest originators and servicers, adding the branches is a way to bolster market share, particularly in Oregon and Washington. It would also build Chase's annual origination volume, perhaps by about $750 million.

For Mellon, shedding its western retail offices is a step toward making the direct-to-consumer business-including the Internet, telemarketing, and direct-mail solicitations-its primary origination source.

"Generally we prefer to grow internally, but in areas where we don't have enough critical mass, we look to fill with small acquisitions," said Glenn Mouridy, chief financial officer of the Chase unit, Chase Home Finance, Edison, N.J.

"It would have been a long process to build this type of business ourselves. This was a way to quickly ramp up to meaningful size to compete with large competitors."

BayView Financial Trading Group, Miami, brokered the sale. Terms were not disclosed. Mr. Mouridy would only say that the price was "definitely not material" for an institution as large as Chase.

Investment bankers not involved in the deal speculated that the business could have sold for 1% to 1.5% of its annual production volume, putting the price between $7.5 million and $11.25 million.

Mellon said Monday that it was selling its commercial mortgage business and was evaluating bids.

As part of the package, Chase also got Mellon's regional operations center in Portland, Ore., where loans originated in the retail branches are underwritten, processed, and closed.

Mellon Mortgage, Houston, bought most of Portland-based U.S. Bancorp's mortgage business in 1994 for $75 million. That included 50 production offices and the rights to service $3.6 billion of loans. It is now selling what remains of those offices to Chase, but retains the servicing business.

Chase is working to build all its origination channels and cover all geographic markets, Mr. Mouridy said.

Retail has "more affinity with the customer than other channels," Mr. Mouridy said, and "the economics in retail are better than in the all the other channels. The profitbaility is stronger."

In the future, he said, "more and more folks will be comfortable with dealing with lenders electronically and over the phone," and Chase is also growing those channels. But "there's still a huge population of folks that need a loan officer to guide them through the process."

Indeed, some of the fastest-growing homebuyer categories, such as first- time homebuyers and immigrants, "require a little more support," Mr. Mouridy said. "First-time buyers are still awed."

Mellon Mortgage, however, is moving away from bricks-and-mortar retail, said chief operating officer Mike Kula.

However, it will for now continue to have retail mortgage branches within the parent bank's main territory-Pennsylvania, Maryland, Delaware, Texas, and Colorado.

Several bank mortgage units have been retreating into the states where the bank has branches, noted George Yacik, a consultant with SMR Research, Hackettstown, N.J. "You get more business in the bank's states because you have more brand-name recognition," Mr. Yacik said.

NationsBank Corp. quietly shut down its upstate New York retail mortgage branches in October last year, saying they weren't meeting expected production levels.

Earlier last year, Fleet Financial Group sold mortgage branches that were outside the bank's footprint to PNC Bank Corp., and Bank United, Houston, sold all its mortgage branches outside Texas.

Because mortgage originations are strong now, Mellon may have been able to command a premium for the branches, Mr. Yacik said.

Mellon still plans to originate loans outside its parent's territory, marketing directly to consumers.

"It's much more efficient moving into new marketplaces though customer direct than to set up a retail branch," Mr. Kula said.

Mellon started its customer-direct division in the fourth quarter of 1997. It has more than 100 employees and is originating loans at an annualized rate of $800 million.

"Our goal is to build customer direct from the number you see today to be our primary source of originations," Mr. Kula said.

Nevertheless, the company does not intend to phase out all physical contact with customers. "We will always have direct contact with the customer in the Mellon Bank branches," Mr. Kula said.

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