Fleet Financial Group held discussions to sell its mortgage banking division to Countrywide Credit Industries, a deal that would have created the nation's largest mortgage bank, but the talks broke down over price, investment bankers said.

The two mortgage giants tried to hammer out a plan last year in which Fleet would have received Countrywide stock in exchange for the unit. Countrywide tried to restart the talks this year, but Fleet balked, they said.

Fleet's $120 billion mortgage servicing portfolio, which is the industry's fourth-largest, would probably sell for more than $1.5 billion, sources estimated. That would require Countrywide to issue more than 50 million shares to Fleet-a price, many investment bankers said, that the notoriously frugal Countrywide was unwilling to pay.

With a sale to Countrywide apparently off, Fleet appears to be beefing up the unit's top ranks. But in recent years it has gone hot and cold on the business, and veteran observers said the banking company would still consider a sale.

H. Jay Sarles, Fleet Mortgage's chairman, wouldn't deny or confirm the talks. "Fleet has explored opportunities and strategic alliances in the context of Fleet remaining as a major player in the mortgage banking industry," Mr. Sarles said through a spokesman last week. Countrywide declined to comment.

At yearend 1996, the mortgage servicing portfolios of the two industry lenders totaled $275 billion, far outstripping top-ranked Norwest's $214 billion. Countrywide, which was No. 1 in the early '90s, would have regained the top spot it covets.

The deal also would have given Fleet a graceful solution to a vexing dilemma: how to boost profits at its obsolete mortgage unit without first spending millions on technology, products, and managers.

Dick Barrett of UBS Securities, who represented Barnett Banks Inc. in a similar deal with HomeSide Inc., said that deal had conferred "the operating benefits, scale, and competencies" of a much larger mortgage company without one company's actually having to buy the other.

The Countrywide deal also would have given Fleet a way to keep its hands in home loans, which are prized these days as a gateway to selling other loan, deposit, and investment products to homeowners.

Two other commercial banks have sought a deal similar to the one discussed by Countrywide and Fleet. BankBoston Corp. joined with venture capital firms to spin off its mortgage business to HomeSide in 1996. And Barnett subsequently sold its mortgage servicing portfolios to HomeSide for an equity stake.

Once a trailblazer in the mortgage industry, Fleet is now seen as obsolete and adrift. In the past year, its Columbia, S.C.-based mortgage unit has been run by three different executives. At its Boston headquarters, the bank shifted oversight of the mortgage unit from one vice chairman, Michael R. Zucchini, to another, Mr. Sarles, in January.

Fleet is taking measures to stabilize the unit's top ranks, sources said. It has hired Chicago-based Heidrick & Struggles Inc., a leading executive search firm. One key post Fleet wants to fill is head of the company's loan production operations.

William Curley, president of Cohane Rafferty Securities, a Harrison, N.Y., mortgage investment banking firm, said Fleet Mortgage is close to filling other senior level posts.

Nonetheless, other sources said, the parent company is still exploring the option to sell its mortgage unit. It is believed to have opened the mortgage unit's books to a handful of mortgage companies lately, among them Countrywide.

Also fueling talk of a sale: Mr. Sarles, a 29-year Fleet veteran, lost a bid to become chief operating officer this year, and headhunters consider him a prime candidate for top posts at other banks.

Industry observers said Fleet has not been satisfied with the profitability of its mortgage banking division. According to Fleet Financial's annual 10-K filing, Fleet Mortgage earned $69 million last year. That was a 20% decrease from the unit's 1995 net income.

Gerard Cassidy, an analyst at Tucker Anthony, said Fleet initially set a 1996 net income goal of $100 million for Fleet Mortgage but later reduced it.

Fleet is now reevaluating its strategy for the mortgage unit, Mr. Cassidy said. And if management cannot improve its returns, he said, sale of Fleet Mortgage is a likely option.

"If they continue to struggle with it, it wouldn't shock me if an alternative strategy, either a sale or spinoff, was developed," he said.

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