Chase Manhattan Mortgage Corp. has renewed its subservicing contract with Source One Mortgage Services for another year, giving Source One more time to build its subservicing business.

Source One said in December 1996 that it was selling $17 billion of servicing rights, the bulk of its portfolio, to Chase. As a part of the deal, Chase agreed to have Source One subservice the loans for at least a year, with the option of extending the deal for two further years.

The renewal announced recently is for one year from March 1998.

Subservicing is a form of outsourcing. Mortgage companies pay a subservicer to administer a loan portfolio, collecting loan payments, for example, and sending out statements.

Other large subservicers are Dovenmuehle Mortgage and Wendover Funding, a subsidiary of Electronic Data Systems Corp. Banking companies such as Norwest Corp. and Banc One Corp. have also gotten into subservicing.

James Ozanne, Source One's chairman, said it has recently landed two additional small subservicing contracts and is talking to other, larger companies about subservicing.

But some analysts said they doubt Source One will capture much new business.

"The question is, 'How much subservicing capacity is there in the industry as a whole?'" said David Graifman, a fixed-income analyst in Standard & Poor's Corp.'s rating group.

When Chase bought the servicing from Source One, it was in the midst of consolidating servicing as a result of its merger with Chemical Banking Corp.

Some industry observers said they thought Chase would not renew the Source One contract. J. Gregory Harrington, senior vice president and manager of mortgage operations at Chase Manhattan Mortgage, would not give details of the agreement but said it made "financial sense" for Chase to keep Source One as subservicer. "The issue was not an inability to bring the servicing in-house" he said.

Chase extended the agreement because it was satisfied with the service and also because the extension would give Source One a chance to execute its new strategic plan, Mr. Harrington said.

Source One has emphasized making conservative loans that can be sold to the secondary-market agencies. But as margins in that business continue to erode, the Farmington Hills, Mich., lender has sought to build a presence in niche areas with higher profitability, such as subservicing and subprime lending.

Source One hired Frank Mohan, a subprime lending veteran, from Beneficial Corp. in September to be president and chief executive officer.

Mr. Ozanne said the company had recently opened a subprime office in Brewster, N.Y. Between this office and referrals from Source One's network of retail and wholesale offices, he said, the company expects to originate $500 million to $750 million of subprime loans in 1998.

For now, Mr. Ozanne said, Source One will sell most of the loans it originates, but he did not rule out securitizing B and C loans.

And as more subprime companies report prepayment problems in their portfolios, Mr. Ozanne said, Source One has been in contact with B and C lenders about subservicing subprime loans.

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