Fund American Enterprises Holdings has called off plans to sell its mortgage subsidiary to Mellon Bank Corp.

The Hanover, N.H.-based company announced Monday that it had scrapped the proposed sale of Source One Mortgage Services Corp. after "four months of fruitless negotiations."

Pittsburgh-based Mellon had signed a letter of intent to buy the Farmington Hills, Mich., mortgage unit last December. The deal would have boosted Mellon's servicing book by $31.8 billion, to $78.2 billion.

Signs that the purchase was off-track began to surface by March, when Fund American announced that talks were going slowly.

Industry sources said Mellon got cold feet after an exam of Source One's servicing portfolio showed it was loaded with risky excess servicing. A spokesman for Pittsburgh-based Mellon declined to comment.

Source One has been on the auction block once before, in August 1994, only to be yanked off the market four months later.

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