Chase gambling that cuts can justify Am Res price tag.

The way Fred B. Koons sees things, the fruits of the future mortgage market will fall mostly to the mega4enders.

These giants, the chairman of Chase Manhattan Mortgage Corp. believes, will be able to wring competitive advantages out of massive servicing portfolios and far-flung originations networks.

"Where I don't want to be is in the 'new middle,' the companies that used to be large and let everybody outgrow them," he says.

To avoid that fate, Mr. Koons recently went to the board of Chase Manhattan Corp. and asked for $348 million to buy American Residential Mortgage, a top-20 mortgage bank.

Well, they gave it to him. And now Mr. Koons is staring down the task of matting that $348 million bet pay off. "Not just pay, but play," he says.

That task may not be so Simple. Though the combined organizations will make Chase the fourth-largest home lender and fifth-largest servicer in the country, analysts and investment bankers view the price paid for American Residential as aggressive.

According to some estimates, not only is Chase paying about 150 basis points for American Residential's servicing, but also about $100 million for the origination's franchise.

That works out to something like $225,000 per loan officer. Quipped one Chase competitor, "Give me $225,000 and I'll go and hire every top producer in town."

Mr. Koons doesn't view things that way. "We're getting more than the sum of the atomic particles of the company," he says. So, again, how does one make the price work?

Architecture's "less is more" principle seems to apply to mortgage banking mergers as well. "You make this thing pay and play by eliminating redundancies in overhead," he said. "You don't need two chairmen, you don't need two secondary-marketing functions."

So after a short transition period, American Residential's top management will depart and the company will be run from Chase's Tampa headquarters.

But perhaps the greatest efficiencies will be wrung from the servicing operation. Chase intends to shut down American Residential's La Jolla, Calif., servicing center, resulting in the loss of about 200 jobs. According to Mr. Koons, the savings would be as much as $25 million. "We have plenty of capacity in our servicing centers in Louisiana and Florida, and our efficiencies will improve with the addition of the Am Res loans," said Mr. Koons.

The net result, according to Chase, is that the acquisition will break even in 1995 and contribute to the bottom line the following year. "We don't intend to lose money on this thing," said Mr. Koons.

But beyond the hard economies of combining businesses, perhaps the true value of the deal to Chase is strategic.

Chase has always been a high-profile player in the jumbo-loan market, specializing in making loans larger than Fannie Mae and Freddie Mac's $203,150 limit.

Besides holding many loans it originates, Chase is the fifth-largest issuer of private-label mortgage-backed securities. But,

American Residential, to his mind, is the solution to that problem. In contrast to Chase, American Residential specializes in loans below the $203,120 mark, selling about 66% of its production to Fannie Mac or Freddie Mac.

The net result is that Chase's volume of conforming loans should double after the acquisition.

Another highly attractive aspect of American Residential is its flexible loan-office system. Because the system concentrates support functions in a regional hub office, it allows for easier, less-expensive expansion in boom times or, as has been the case this year, contraction in times of slower originations.

So, is Mr. Koons serious about his vow to become the third-largest lender by 19977 He responds: "Well, I said it in front of the board; they heard the words come out of my little mouth."

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