Chase Manhattan Mortgage Corp. is making a big expansion move by buying $19.3 billion in servicing rights even as it reportedly struggles to integrate its Chase and Chemical units.

Industry sources said the move is a vote of confidence for Chase Manhattan Corp.'s mortgage unit. Chase is making a significant investment - estimated at $250 million to $300 million based on recent transactions - even though it hasn't completely finished merging the servicing operations of the former Chase and Chemical mortgage companies.

Stephen J. Rotella, executive vice president of the mortgage unit, said Chase's main long-term strategy is to expand its servicing portfolio because it has been solidly profitable. Loan originations have been unprofitable industrywide in recent years, and servicing income has taken up the slack.

The banking company has said it is taking a hard look at all of its businesses to see if they are providing acceptable rates of return. The corporate goal is a return on equity of 18%, a level not often seen in residential lending.

The servicing seller, Source One Mortgage Services Inc., announced the sale more than a week ago but did not name the buyer.

Chase will have some time to put its house in order before having to take on the new servicing chores; Source One has a contract to subservice the loans for at least a year. The contract gives Chase the option to increase the terms to three years.

Subservicers perform the servicing tasks - collecting and processing monthly payments - for a mortgage portfolio but do not own the rights to service the loans.

Chase's servicing portfolio increased from about $80 million to $140 million as a result of Chase Manhattan Corp.'s merger with Chemical Banking Corp. earlier this year.

Mr. Rotella said the Source One servicing was attractive because of the size of the portfolio. "We accomplished in one transaction what it would take many smaller transactions to achieve," he said.

One Wall Street dealer said that the move made strategic sense for Chase. First, there should be greater efficiencies from having a larger portfolio. And second, Chase gets another new group of customers it can cross-sell to, the dealer said.

But other industry sources wondered why Chase would purchase more servicing since it has been having a far more difficult time consolidating its mortgage operations than the company is willing to let on.

One mortgage banker called Chase's mortgage unit a "quagmire," pointing out that both Chase and Chemical were digesting other mortgage acquisitions even before their merger earlier this year. In 1994, Chase bought American Residential Holding Corp. and Chemical purchased Margaretten Financial Corp.

Mr. Rotella acknowledged that Chase's first priority is to complete the consolidation of the servicing assets from Chase and the former Chemical unit. To that end, Chase is integrating technologies so it can manage its entire portfolio on one system.

The company also is closing a servicing center in Tampa and will run the servicing operations from just two facilities, one in Columbus, Ohio, and the other in Monroe, La.

Mr. Rotella dismissed talk that Chase was having difficulties digesting the Chemical acquisition, saying that the integration process is actually proceeding "slightly ahead of schedule."

And although Mr. Rotella wouldn't say if Chase was planning to extend the subservicing contract with Source One past the one year, he did say that Chase's ultimate goal is to have all of its servicing combined under one platform.

The addition of Chase's subservicing will make Source One one of the largest subservicers in the country. Terry Baxter, chairman of Farmington Hills, Mich.-based Source One, conceded that the contract with Chase is by no means an indefinite one but added that the company will do its best to try and keep Chase as a subservicing customer for the long term.

Once the deal closes Chase will have a servicing portfolio of about $160 billion. This would make the company the second-largest servicer after Norwest Mortgage Inc.

But this distinction may be short-lived. Countrywide Credit Industries, currently the second-largest servicer, had a servicing portfolio of $153 billion as of Nov. 30. The Chase-Source One deal isn't expected to close until the end of January, Mr. Rotella said.

The deal was arranged by Cohane Rafferty, Harrison, N.Y., an investment banking firm that specializes in mortgage banking transactions. It advised Source One.

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