Joining the acquisition frenzy in mortgage banking, Norwest Corp. said Thursday that it has agreed to buy the mortgage unit of Michigan National Corp.

Norwest, which has expanded rapidly in mortgage banking in recent years, would gain the rights to service some $8.6 billion of home loans. That would expand its current servicing portfolio by nearly 20%.

Terms weren't disclosed, but a well-placed source put the price at about $125 million.

Meanwhile, market sources said Citicorp is in preliminary negotiations to buy Source One Mortgage Services. Source One, based in Farmington Hills, Mich., would be the largest mortgage company to ever change hands and would likely fetch more than $600 million.

The dealmaking comes as the mortgage industry is undergoing a rapid-fire consolidation.

Just last week Chase Manhattan Bank agreed to acquire American Residential Holdings for $348 million, joining Chemical Bank, which earlier this summer purchased Margaretten Financial for $373 million.

Many banks have come to see mortgage banking as an attractive way to forge ties with consumers and build fee income.

While Norwest has enjoyed enormous growth in mortgage banking in recent years, the company has thus far done so by opening new offices rather than buying up competitors.

Observers said the recent downturns in originations nationwide led the company to consider buying assets from rivals.

"It is hard to expand in a contracting market," said a source, "but acquisitions is one way to go."

Under the deal, Norwest would gain the servicing portfolio of Michigan National's mortgage unit, Independence One. Norwest, based in Minneapolis, also would pick up a servicing facility and 20 originations offices outside Michigan.

Michigan National announced in late June that it was se. eking a buyer for the mortgage unit.

Though Independence One has grown quickly in recent years, it has also suffered as prepayments in its servicing portfolio caused more than $100 in write downs.

Michigan National estimated that the sale would produce an aftertax gain of $27 million.

In the case of Citicorp, a purchase of Source One would mark a dramatic reversal of strategy.

A mortgage leader in the 1980s, the New York banking giant sharply retreated from the field three years ago amid a credit quality debacle. Now the company is evidently planning a comeback.

"I think they may be afraid that they are going to miss the boat that the large mortgage banks will all fall to their competitors," said an investment banker.

Fund American Enterprises Holdings, the parent of Source One, announced late last week that it had hired Lehman Brothers to help evaluate an unsolicited offer for the mortgage unit.

Others to Offer Bids

Sources said that Citicorp was the suitor and that the process will be opened to include other interested buyers.

Citicorp officials could not be reached for comment, and Source One declined to comment.

In the announcement last week, Source One cautioned that it eventually may choose not to sell.

Like Michigan National's unit, Source One was hurt over the past year as falling interest rates prompted a surge of mortgage refinancings.

As homeowners paid off their existing loans, servicers were often forced to write down the value of the portfolios. Possible Pairings Merger: Citicorp/Source OneLikely price: $600+ millionCombined servicing: $83.6 billion Merger: Norwest/Independence OneLikely price: $100+ millionCombined servicing: $54.7 billion Opposite Directions Changes in servicing rights Citicorp Mortgage1989 $52.2 billion1993 $30 billion Norwest Mortgage1989 $0.8 billion1993 $39.3 billion

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