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Thoughts on the Potential FirstLine Sale

FirstLine-mortgagesThe implications of CIBC selling FirstLine, if and when it happens, are manifold.

At this point, it can’t definitively be said whether CIBC will leave a foot in the broker channel.

Assuming it doesn’t, here’s our stream of consciousness on what this means…

On the gravity of this news…

  • Lenders have come and gone from the broker market, but none as meaningful as FirstLine.
  • FirstLine and its predecessor have been strong broker advocates since the 1980s.
  • It was the top lender by volume less than nine months ago.

On who might buy FirstLine…

  • Multiple parties have reportedly lined up to evaluate a purchase of FirstLine.
  • Some think it could be a turnaround play if the buyer has a balance sheet to lend from.
  • It’s hard to imagine how a smaller non-deposit-taking lender could successfully fund FirstLine’s sizable volume. Unlike CIBC, it would likely have far less access to funding capital (i.e., no deposits/GICs, little ability to issue senior notes, little ability to issue covered bonds, and insufficient ability to issue enough low-cost mortgage-backed securities).
  • Whomever bought FirstLine would get the company at a fraction of what it might have sold for a year ago (before it lost market share and goodwill by setting pricing unreasonably high relative to competitors, closing two broker underwriting centres, and terminating stated income products in [only] the broker channel).

On implications for the broker industry…

  • This news puts the broker distribution model under a microscope.
  • At the same time, CAAMP CEO Jim Murphy notes that, “While CIBC’s decision to exit the Mortgage Broker channel by putting FIRSTLINE up for sale is strictly a business decision; every change in business provides an opportunity.” Murphy says he’s “confident that mortgage brokers and those that support the channel, including lenders and insurers, will seize that opportunity.”
  • The #1 broker lender by volume, Scotiabank, has not wavered in its commitment to brokers. Managing Director, Real Estate Secured Lending, David Stafford, told us recently: “Scotiabank is very committed to the broker market, and as you know has made major investments in the channel over the past few years.”
  • Some believe TD may re-evaluate its position in the market but that’s pure speculation. If TD played its cards right it could pick up meaningful volume (as it already has from FirstLine) and have better control of broker pricing and compensation.

On the effect on brokerage houses…

  • Most national brokerage networks earn modest profits. Some are money losers and need to rethink their place in the market.
  • It won’t get any easier to turn a buck in this business. Consolidation of brokerage networks is a given in our view as compensation falls and scale economies become vital. A CIBC exit from the channel could accelerate these trends.
  • Owners who thought of selling before will likely look harder at selling now, in fear of another shoe dropping and further threatening their valuation.

On broker’s ability to compete…

  • Practically speaking, CIBC has priced FirstLine’s rates out of the market since April 2011. Brokers have a long list of lender options and have generally had little trouble competing aggressively since that time.
  • Beyond interest rates, Murphy says “professionalism, knowledge and advice” is what sets brokers apart. The specialized know-how of experienced brokers lets them go head to head with any bank’s proprietary sales force. That won’t change for a while to come and consumers will continue to benefit from the price competition brokers make possible.

Photo credit: Iceculture Inc.

Rob McLister, CMT