Have Brokerage Valuations Peaked?

Peak-in-broker-valuationsThere will long be a demand for the valuable personal guidance of professional mortgage planners.

It’s our strong belief, however, that competition, disintermediation (direct-to-consumer models) and online mortgage information portals (which make consumers believe they don’t need one-on-one advice) will shrink broker ranks significantly over time.

For many brokerage owners, their brokerage valuations may never be higher than they are today.

The brokerage model is under threat from declining agent compensation, falling broker share, tighter agent splits and potential bank departures from the channel. One national brokerage head, who wanted to remain nameless, told us that he estimates 90% of larger brokerages are losing money.

He says, were it not for side deals with lenders on white label mortgages, and extra volume bonuses paid by lenders to brokerages, many national brokerages would be significantly underwater. (Incidentally, neither of those revenue sources are typically disclosed to agents, not that there’s anything wrong with that.)

Given this reality, two camps are forming in the brokerage space:  Buyers and sellers.

The buyers are those brokerages with retained capital, meaningful volume growth, and highly efficient brokerage operations.

The sellers are those with marginal or negative cash flow, insignificant volume growth, weak brands and few sustainable competitive advantages.

Gary-Mauris“With the constant changes in our industry and the current fragmentation of the broker channel, I believe 2012 will bring substantial consolidation,” Dominion Lending Centres President, Gary Mauris, told us last week.

“We have had conversations directly with two large national brokerages about the possibilities of acquiring their organizations. DLC is interested in the acquisition of any mortgage firm, either regionally or nationally, that demonstrates value, profitability and sound management,” he said.

Michael-BecketteMortgage Alliance president/CEO, Michael Beckette, said his firm is also open to strategic combinations. “We’d be interested in any acquisition that makes sense,” said Beckette. “We had a very successful acquisition of the Meridian network a couple of years ago and would be very interested in talking with people who have similar visions.”

Pacific Mortgage Group (parent of Mortgage Architects and Radius Financial) has also been entertaining brokerage firm acquisitions. Pacific is one of few industry players with the financial resources to pull off sizable brokerage and lender mergers (It was one of a handful of finalists to buy Resmor’s mortgage operations.)

There’s been much recent talk about who is for sale.

  • Verico comes up repeatedly, enough so that it sent an email to members Feb 17 denying reports that it had been sold, and calling the rumours a “negative sales tactic” by competitors. John Kelly, COO, told us yesterday: “Pigs still don’t fly…and (Verico) is not in the market to sell.”
  • Mortgage Centre (MCC) has also been a reported target. We’ve heard from sources we believe reliable that CIBC is open to discussing a sale of Mortgage Centre should a potential buyer have interest. A sale is by no means certain, however. CIBC has reportedly assured MCC owners, via a recent conference call, that MCC is a key part of its distribution strategy for CIBC products.
  • Various smaller brokerage firms have had formal or informal talks with large firms, according to multiple brokerage heads we’ve spoken with. Smaller firms are especially vulnerable because they don’t have wide agent bases to spread administration, technology and support costs.

One thing seems apparent in all this: There is power in numbers (more specifically, in volume).

Marginal competitors who can’t amass volume will not have necessary pricing and compensation leverage with lenders. That makes their agents less able to meet growing competition from banks and credit unions.

For those brokerages that are sellers, now is the time to be making deals.

Rob McLister, CMT

  1. Rob, thank-you for continuing to use your platform for an unbiased view of the state of the industry. I of course had heard all the talk about brokerage consolidation lately and enjoyed knowing that it is more then just an over excited rumour mill.
    I especially enjoyed reading your “between the eyes” statements to brokers about the very real threats moving forward. From where I sit I think more brokers need to “face the brutal realities” of what lies ahead.
    Thanks as always.

  2. Instead of acquisitions and consolidations why haven’t the brokerages partnered together much the same way that Credit Unions do and have cost effective support services provided through one shared entity CUC’s (Credit Union Centrals)?
    Isn’t that one way to bring strong branding and cost effective services to a market?

  3. This is a very timely article Rob. If mortgage brokerage volumes shrink over the next couple of years how will that impact super broker and network models? I think there is a very simple answer: the low cost models win.
    When total revenues shrink principal brokers have problems even bigger than simply having less money coming in. The brokers also have the pressure from their agents wanting to both reduce expenses (cut off monthly marketing fees) amd increase splits to offset reduced volumes. Agents are generally on short term contracts so they can flee their existing brokerages to lower cost, higher split environments fairly easily.
    Also, there are often wrong assumptions many people make about networks that have low flat fee charges to their brokerages. Outsiders think that low revenues make the network itself unsustainable. That thinking ignores the key fact of low overheads. One huge national brokerage has 5 salepeople in Ontario the other has one. This comparison of overheads goes on and on. If the low cost model has very low overheads then the model itself is very sustainable.
    We will no doubt see many surprises in next 2 years as the brokerage landscape changes but I think pure logic applies in most small businesses: if the marketplace is shrinking and revenues are falling overheads must also be reduced.

  4. Another question might be “Have brokerage valuations ever (truly) existed?”.
    Given the rarity of mergers and acquisitions in this industry on any kind of meaningful scale for any kind of meaningful dollar amount, brokers should have been questioning the typical business model long ago. The only firms I’ve seen trade hands have sold several times for less money each time. That’s not how it’s supposed to work.
    By comparison, the insurance and financial brokerages trade hands often and there are clearly understood metrics for valuing those firms.

  5. Rob:
    Great Article as usual. Our greatest foes, and whom we must chiefly combat, are within and to see what is wrong we need to look at the Mirror and not the telescope!
    Mortgage Brokers and Agents have squeezed their brokerage house’s profit margins to a level that is almost impossible to make money. How do you think a brokerage will make money on 95-5 or 100% Splits? Do you expect that brokerage to provide you with services for that money as well? Now you are wondering why the brokerage houses are making side deals with lenders on the commissions and don’t tell you about it? You are upset that they make money on CAAMP kickbacks? Do you really know how that money on the “MARKETING FUND” has been spent or do you get “Audited Financials” on the “Marketing Fund “?
    Mortgage Brokers and Agents have squeezed the lenders so much that there is no more room for lenders to make money! It’s cheaper for them to get business through other sources (Their own sales Force, Branches,..) no wonder more banks, credit unions and trust companies cutting brokers! This trend will continue!
    Our industry lacks integrity, honesty, vision and transparency and instead is full of Salesmanship, Ego’s, Spin doctors and copy cats! Why do we have so many prima Donna’s? Because we make good money doesn’t mean we are smart, Does it?
    Our industry associations has become a “cash for life” for the people working there and those people have stopped thinking and being creative and have started playing politics! A brokerage of 1000 people pays CAAMP $275,000? What do they get for this money? Then you have a major bank with Billions in profits pays less then $15,000 per year on Membership fees?
    Enjoy the good days my friends because very soon you will see more lenders will leave the brokerage market place, you will see the broker market share drop to 10% or lower, commissions will drop to 50 BPs and lower and your consumer will realize that they don’t need you and they can get all the advice and support from a powerful and strong website and save their money!
    Please note that I am not an enemy of the industry but actually someone who loves this industry and cares about the industry! “In the End, we will remember not the words of our enemies, but the silence of our friends.” Martin Luther King.

  6. Nothing But The Truth: if you say that you love the mortgage brokerage industry I would sure worry about what you would have to say if you hated the industry. Wow, there was a lot of negative stuff in that post!

  7. That is some pessimistic outlook, but I’d be curious to know who are these lenders that are cutting brokerages? The CIBC thing?
    Given the nature of the economy, the size of the mortgage market in Canada, and the fact that household debt has increased so much, this is a prime opportunity to capitalize on refinances and consolidation as consumers dig themselves out of a deep hole. The banks are not going to start reducing underwriting standards and take on more risk. If anything, they are gearing for a lackluster year.
    Yes, in essence it means going back to the basics and concentrating on high risk, high reward deals. The world’s leading economies are highly indebted and so are many of their citizens. Households would have to de-leverage at some point and if we hit an employment shock where unemployment continues to climb, this could represent a huge opportunity to capitalize on all those who are unable or unwilling to consolidate with traditional prime lenders.

  8. I think it’s pretty normal situation.
    Internet age … people are informed (well not all of them, but more and more).
    Most people look for lowest rate. Banks or brokers, all they care about is the rate.
    Pretty sure lenders will have advantage if they keep same rates as brokers.
    People don’t really care about backstage operations, they want better deal usually when going to a broker.
    Sadly, broker’s fate depends on the lenders good will partially.

  9. At the end of the day, it’s all about the customer. There are way too many broker networks and few that help agents deliver value to the customer.

  10. Every company has a value. If consolidation occurs like this article predicts then we’ll start to see how high (or low) those values really are.

  11. Same as with home renovation contractors :)
    There are many out there, but will you get to a good one that will do the job right ?

  12. The future of our industry is going to depend a LOT on us as brokers. How are we going to compete with the banks and each other? If we’re willing to settle for being solely a service providers the market is likely going to run us over. If we’re able to bring real value and distinguish ourselves from the banks we have a real fighting chance.
    We can’t see ourselves as just restaurant style, order-taking servers anymore because the consumer wants more. Doing business based solely on low rates and good service won’t cut it anymore. Just ask your Realtor partners (if you have any you would really call partners), what they do when someone comes to them pre-approved. None I’ve spoken to see any value in really directing their clients to a broker – we haven’t given them any good reasons to.
    This is not meant to be a blanket statement, I realize there are a few brokers out there who have managed to separate themselves from the pack and add real value to their clients. The point is, as an industry, we’re behind the 8-ball on this and we really need to distinguish ourselves from our competition if we intend to survive.

  13. “Verico comes up repeatedly, enough so that it sent an email to members Feb 17 denying reports that it had been sold, and calling the rumours a “negative sales tactic” by competitors”
    just curious if Verico people mean DLC? the fact the word is getting out there that DLC is buying Verico! sounds like lots of hot air!

  14. I am relativly new to the mortgage broker world, I dont see any real problems wirh the brokerage business model. I think its goodto see banks getting competetive for business. It forces the broker to be more responsive to client needs, pick up your phone when it rings, be mobile and see client outside of office, offer value, and follow up with your database. Lets do business better than the branch does and you will never be
    out of business

  15. Rob, I like the articles you post. It is very obvious you are connected, in tune and do a pile of research before you post and I commend you for your hard work. I can’t imagine trying to run a successful business and be a full time “news reporter”. I think the factual information you provide is so needed in an industry that has largely been secretive.
    I am concerned when we have so many of our “industry leaders” on these articles talking about how we must wake up and realize we are in trouble. If you were to show up at any job and each day your boss (your leader) told you to be concerned for your career, to become better without providing a solution, or providing a solution you have to pay handsomely for then you are eventually going to start to believe it. There are only so many days where you can sit in that environment and excel at your career. Have our “leaders” not considered this when they are on here telling us how doomed we are. I am certain that if you polled the top producing and most successful Brokers in our nation most of them would tell you they don’t read or pay attention to these articles and comments because they don’t want doubt to creep in.
    I agree hole heartedly that we have some serious issues in the Broker Channel and unlike those who think it is all about the banks I think it is all about us. There is all this talk about rate buy downs and other tactics Brokers use. In my opinion all of these tactics are just part of their business model. Let it be already. The problem I see being fostered is that of internal attitude. How on earth can we expect our channel to survive, never mind excel when we are being told regularly how in trouble we are. The answer to our troubles is not to just support the monoline lenders and offer a strategy instead of a rate. The solution begins by having our Brokerages, Broker owners and leaders create an environment where we can succeed. I don’t know about the rest of you guys but I wouldn’t mind reading some success stories every now and then.
    If the message our leaders are trying to send us is so they can sell us something then we are in real trouble!

  16. Concerned, there will always be individuals who succeed in any market, any environment, at any point in a business cycle and those people are the stars and future stars in our business.
    That being said in his role as a reporter Rob talks about industry wide trends and whole business cycles and the points he makes are factual.
    Sometimes when we see things in the media we would prefer not to see (like burning houses on the cover of Macleans magazine) we want to blame the media for creating a false public impression but the truth is the media just reports expert’s opinions and statistical facts and the at this precise moment in time Rob is reporting the reality of our whole industry.
    If you want industry leaders want to say positive things to encourage “the troops” thats fine and dandy but it will not change the facts.

  17. I agree 100% Ron Butler. My post was not an attack on Rob and his reporting. I think what he does is great, the facts are the facts and the more of them we know the better off we are.
    My comment was reserved for the people who are regular contributors to the comments sections of many of the articles on this site and others. The site is not the issue and the reporter is not the issue. The people who come on here with their continued negative comments on one hand and the “solution” on the other hand are not good for the business, that is all.
    No ill will towards Rob, keep up the good reporting.

  18. Hi Concerned,
    First off, my sincere thanks for the kind feedback on our reporting.
    Regarding the negative commentary, everyone who cares about this tremendous industry wishes they never had to read/comment on these types of stories. We wish we never had to write them. Nothing gives me a sick feeling in my stomach as do articles portraying threats to our business.
    The primary reason we post them, apart from disseminating facts and observations, is to give brokers time. Knowing what may lie ahead (with enough lead time) allows colleagues in this business to adapt.
    Sometimes people’s most profitable changes in life occur because concern compelled them to act. That’s what stories like this are intended to inspire.
    All that said, considerable opportunity and niches will remain in this business for professional brokers who put clients first. More than ever, we need to ask ourselves: What “pains” today’s modern mortgage consumer, and how can we alleviate that pain better than our banking giants.

  19. @concerned: people will not listen and look for a solution, if they dont know there is a problem. Most people in this industry still think everything is fine! most brokers dont care if FirstLine is Closing Down! most brokers dont care if their brokerages losing money but they are making 95-5 Splits!
    Dont shoot the messengers!

  20. Rob, I can’t tell how much I feel the same way. I am so committed to this business that I brought both my sons into it 10 years ago but the truth is that now I look out my office window and I can just picture a storm surge of bad events coming crashing in from Lake Ontario. So thanks for continuing to point out the facts for that huge, key reason: so we can plan!

  21. So how do we succeed? What do we need to do different? One reply said that “the best rate” and “good customer service” don’t cut it anymore – so what does cut it?

  22. Well said Paul. This was a strong point at the CAAMP Symposium in Kelowna yesterday. We have to stop looking at deal based transactions and more on client based transactions as that’s what will build true value in ones business.

  23. that is the million dollar question, isn’t it. in my opinion the relicencing is a great thing in ontario because hopefully it will consolidate the # of incompetent brokers out there. secondly you just have to stay a step ahead of the major players. of course best rate and service don’t cut it anymore. In my opinion you either have it or you don’t. It isn’t just visiting someone’s home with mortgage in hand, it is offering a life-long view of their mortgage finances from a to z. it’s also about having some personality and integrity when dealing with people.

  24. I don’t think re-licensing is going to have the great impact that most believe it will. After all, it isn’t as if re-licensing requires much $ and it isn’t as if the test is particularly difficult. Agents who intended to stop doing business won’t do so because of a gimmicky test. They’ll move on because they’re not having success.
    RE: I think Rob has many valid points. I am also of the belief that struggling industries provide an excellent opportunity for the most efficient companies to succeed and make tremendous gains in market share.

  25. Re-licensing? Haven’t heard anything about that – maybe it’s not come up in Alberta or I missed it. I’d be pretty annoyed to have to re-license 12 months into passing my exam in the first place. That said – totally a joke, anyone could do it, I think I studied for a few nights prior and was the first one finished. Seems more like a cash grab than a screening or training process.
    That said, I have yet to interact with a client that isn’t wondering “how much, best rate”. To me the clients aren’t looking for long term mortgage planning. I’ve got one client who wanted the most paydown over 5-years, other than that rate/amount trump everything and likely always will.

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