Fleet Financial to Buy Plaza Home Mortgage : Finance: Deal comes as rising interest rates put a crimp in refinancing activity, reducing profits.

Reflecting a continuing contraction in the mortgage banking industry, Plaza Home Mortgage Corp. said Tuesday that it will be acquired for $120 million in cash by Fleet Financial Group.

The acquisition of fast-growing Plaza, based in Santa Ana, would make Fleet the nation’s fourth-largest mortgage provider, with $13.4 billion in loans made through July. It would be the nation’s second-largest mortgage servicer, billing and collecting payments on $88.2 billion in loans.

Fleet, based in Providence, R.I., would also gain a substantial presence in California, where it has been conspicuously absent.

Analysts hailed the transaction as a boon to both companies. They pointed out that Fleet would become a substantial player in the nation’s biggest residential real estate market and that Plaza shareholders would receive a good price--$10.125 a share--for their stock.

News of the pact boosted Plaza’s stock 17% to $9.625 a share, up $1.375, in Nasdaq trading Tuesday. Fleet’s stock rose 37.5 cents a share to close at $40 on the New York Stock Exchange.

“The whole mortgage banking business is very difficult now,” said Gary Gordon, an industry analyst with the brokerage PaineWebber in New York, “so everybody is having a tough time competing.”

Mortgage banks such as Plaza have been hurt as rising interest rates have ended a long boom in mortgage refinancing activity that had helped make the industry highly profitable.

While the industry’s loan production nationwide is expected to fall by a third this year--from $1.05 trillion to $750 billion--companies such as Plaza that rely entirely on residential loans have found their volume cut in half, Gordon said.

“Luckily for employees and shareholders, commercial banks have a very strong interest in mortgage banking,” he said. “They see the downturn as their chance to get into the industry or expand.”

Among big banks that have bought mortgage lenders are Chase Manhattan Bank in New York, which said last month that it would acquire American Residential Mortgage Corp. in La Jolla for $348 million, and Chemical Bank in New York, which bought Margaretten & Co. in Perth Amboy, N.J., for $330 million. Also last month, North American Mortgage Co. in Santa Rosa, Calif., hired an investment bank, partly to help it find a potential buyer.

E. Gareth Plank, an analyst at Mabon Securities in San Francisco, said that Fleet, to maintain its position, “really needs to take advantage” of the industry’s doldrums to acquire good operations such as Plaza. “It’s also savvy for Fleet because it moves them into a market where they have been pointedly absent from,” he said.

John T. French, Plaza’s chairman and chief executive, said the company’s directors felt that “we owed it to our stockholders to test the market.”

“One of the things we had to look at,” he said, “is how people our size compete with companies like NationsBank and the other banking giants that are buying S&Ls; and mortgage companies.”

The transaction, expected to close by year’s end, is subject to the approvals of federal banking regulators and Plaza shareholders. No shareholder meeting has been set.

Fleet said it hasn’t decided how many of Plaza’s 1,140 employees it would keep. Eugene M. McQuade, Fleet’s executive vice president for finance, said that “less than a handful” of Plaza’s 40 loan offices in 13 states would be closed and that Fleet would maintain a strong regional office, probably in Santa Ana. But Plaza’s loan servicing operations would be relocated to one of Fleet’s centers in Milwaukee or Columbia, S.C., he said. Plaza has 450 employees in Orange County.