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

  1. With the introduction of the collateral charge recording of TD mortgages in the fall of 2010, a move largely unfavored by Brokers due to lack of options at renewal, one could interpret this as a move towards aggressive customer retention at the mortgage origination stage, rather than competing for the business at maturity stage. Perhaps setting the stage for a potential exit while shoring up the customer ranks originated in the Broker channel at the same time they are aggressively bolstering their internal sales force. Having Ed Clark, arguably the most politically connected of all the bank CEOs, the first one to make mention of shorter amortizations and tightening regulations further, grand-standing on Bloomberg (US) talking about the banks in Canada taking it upon themselves to ‘self-regulate’ the lending environment via pricing (mortgage and other) is a very interesting turn of events in our industry. The pending sale of FLM and CIBC’s exit is not surprising; the banks further distancing themselves from the Broker Channel is not a favorable position to find the Industry in, a move backwards. In Canada we have the Big 5, in Australia they have the Fat 4, Oligopolies traditionally do not like to share too much.

  2. Private insurers, FSB, Private insurers accessing competitive rates, revolt against CHMC?
    all absolutely nothing to do with the important subject at hand!
    Get your ADHD medicated buddy!

  3. This is NOT a good thing for our industry and eventually the consumer will suffer in the end. I am and have been a FLM supporter for years even when it has been very hard to do so.
    FLM has always had a layer of stupidity to it and the further up the chain you go you can see why but that being said there have and are some very good people who work there now. I cannot say enough about how professional and amazing our own RBM is and hope that Sara M will be around our industry for a long time to come. I feel for them at this moment and I imagine that being an employee there is soul sucking and is somewhat like the horror movie the human centipede with the smarter more caring ones at the bottom.
    I do feel that if you want to run a company into the ground on purpose then FLM should be an example of how to do so step by step.
    Banks look at brokers as the enemy and want us gone, competition is bad for banks and great for the consumer. The banks are incredibly profitable but want MORE, what they fail to realize is that when they have it all no one will have anything left to put in their bank.

  4. From the cutbacks at the broker level.. I would not agree with the statement below as time and time again.. “the branch can do it”
    but through SMA we can’t .. ie.. mortgages in company name, tightened Rental options etc etc… Scotia does not create an equal playing field when it comes to supporting Brokers.
    “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.”

  5. Lenders with retail and broker channels often have different policies in each channel. While it’s extremely aggravating that Scotia favours the retail channel for certain products, that does not speak to its commitment to remaining in the broker channel–which is the point I aimed to make. Cheers… :)

  6. Where does this leave The Mortgage Centre?
    They are a division of CIBC Mortgages which is a member of the CIBC group of companies.

  7. With this news I’m really looking forward to the FLM rewards trip this year! Gonna be interesting! Can’t wait for the ‘spin doctors’, and I’m not talking about the one hit wonders from the 90’s!
    That said, lets look at the benefit to CIBC. It has 3 channels… CIBC, PC and FLM. CIBC and PC are CIBC created, FLM was separate purchase, kept separate from CIBC and ran it’s own show… and until recently was number 1 in our channel for mortgage origination.
    In whatever fashion FLM disappears, this ‘could’ allow CIBC to consolidate brands… which means, one set of upper management, consolidation of underwriters etc. (are ya hearing lowering overhead??) The end result ‘could’ be a CIBC brand available to the broker channel with a streamline management and process. That equals lower costs… better pricing… or more profit to CIBC.
    This decision is not something that showed up this week. It has been reviewed on a cost basis over the last year +.
    When you combine the mortgage volume from the 3 brands, CIBC, PC and FLM the numbers were considerable. So is 3 sets of management and overhead! Consolidation could just be something that may make the channel better.

  8. I suspect the cocktail bill will be a bit higher than usual on this year’s trip.
    You’re right in that nothing can be ruled out at this point.
    One thing that’s certain is David Williamson’s (SEVP CIBC & Group Head, Retail and Business Banking) stated vision.
    He outlined CIBC’s mortgage strategy clearly on its Dec. 1 conference call.
    CIBC’s Mortgage Strategy
    CIBC will “focus on [its] branch channels more so than [its] broker channels” in an effort to create “deeper client relationships” (i.e., sell more non-mortgage products and earn higher net interest margins).
    The bank will reportedly hire hundreds of Mobile Mortgage Advisors by year’s end. We’ll see if there’s enough room left over in the sandbox for brokers. Most knowledgeable observers we’ve spoken with (but not all) have considerable doubts there will be.

  9. I agree with the comment of CAAMP CEO Jim Murphy, this leads to new opportunities for other players. My personal view is that the only constant area in business is change, so we as brokers need to continue to learn and adapt.

  10. Hey Rob,
    Thanks yet again for your insightful post. I would like to encourage brokers to remember that while we cannot change what others do we can certainly control what we as individuals do.
    This is certainly another wake up call. We need to become a more efficient distribution channel for our lending partners. If we don’t they will find another way. It’s not about ditching Banks to support monolines, the money supply is finite. It is about being efficient, professional and fraud free for all our lending partners.
    Lets focus on what we can do as a channel and continue to get better as a collective.

  11. Highly doubtful that CIBC would work with the broker channel in the future. While I don’t think that they sabotaged FLM for the past 10 months, it definitely looks like a coordinated exit from the broker channel and effectively putting the brakes on the origination of new business. There is no way in hell that the decision for get rid of FLM came recently given the massive size of FLM’s mortgage portfolio.
    The main reason banks don’t want to deal with brokers any more is:
    1) Brokers can’t up-sell or cross sell other financial products for the same institution that can offset the loss in margin on mortgages: given the fierce competition the market mortgages have effectively become loss leaders to the big banks. Margins are nowhere near where they used to be and this is especially evident in a very low interest rate environment. That’s why there’s drive by the banks to branch into wealth management and basically create a fence around their clients using ONE brand. This is what CIBC is doing, this is what BMO did, and I wouldn’t be surprised if TD joins them pretty soon. National Bank would remain with brokers because it’s a very effective distribution channel for them. They are not very big outside of PQ and partnering with brokers is one way to establish themselves in the rest of Canada (something that their CEO has already committed to in an interview with G&M last year)
    2) Compensation: bank originators rely on volume to make money because banks don’t really pay much to their commissioned sales force. For the major banks, it’s far most cost effective to originate business through an in-house team, have your staff cross sell other products AND pay them peanuts for their work rather than pay more, in some cases a lot more, for brokers to originate the business where a broker not only doesn’t cross-sell other financial products but can also take the client away come renewal time (current stats are showing we’re doing rather pathetically in that area) :B
    At the end of the day it’s all about money, pure and simple.

  12. @TL I have a little birdy that provides me with inside knowledge of what’s going on in the background. You can’t be good at what you do without knowing what’s about to happened. To fail the audit means that their paperwork did not meet the CMHC standards and guidelines. This is a big thing for both companies

  13. Jim Murphy is exactly right – “professionalism, knowledge and advice” is what sets brokers apart.
    Mortgage brokers that give the client guidance during the process of securing a mortgage, and one that in vigilant in assuring their clients mortgages are the best one for their financial needs, will continue to grow.

  14. This is my opinion, but I see the broker channel remaining at the 25, 30% market share with a possible decrease! I agree we need to be professional, ethical and above reproach. In the end we will be a niche/specilized source for mortgages. The banks will never offer the flexiblity we can muster. I am not surprised FLM packing it in in fact I expected it when CIBC took over. It took them a decade to pull the pin!!

  15. Hi Lior,
    Re: “There is no way in hell that the decision [to] get rid of FLM came recently”
    That’s probably a reasonable deduction. On that note, a few folks have emailed us about the statement “the official decision to sell FirstLine is extremely recent.” So I’ll clarify again.
    As I wrote Feb. 11, CIBC has reportedly been considering a FirstLine sale for a while, but sources say CIBC just recently disclosed its intentions to parties outside of CIBC (potential buyers). That decision reportedly made it “official” that CIBC was proceeding with a sale.
    (We’re required to note that none of this should be considered factual unless and until confirmed by CIBC.)

  16. This is very good and all but at the same time the stats are pretty clear: brokers and bank reps are 50/50 with first-time home buyers but when it comes to renewals brokers are doing pathetically. It’s not that bank reps are doing differently; they’re not! A lot of consumers just prefer *remaining* with a bank, some are even willing to pay higher rates, than come back to their originating broker. The broker community has to ask itself why is that?

  17. It’s about quality, not quantity. The industry doesn’t need any more monoline lenders. What it needs are strong banks with strong balance sheets, basically subsidiaries of financial institutions like ICICI, ING, etc. that can compete with the Canadian banks. A huge potential player for the Canadian market is Loblaw and PCF if they’re willing to do away with CIBC which is just dragging it down. Lending products also have much higher margins than groceries so for Loblaws, if they’re willing to take this head on, the potential income and client base is huge because they already have the infrastructure (stores) in place as well as dedicated clientele. Instead of having some schmuck chase you around with a pack of cookies to open a free chequing account, why not become a full-fledged bank like ING, for example? In my view, that’s the only way you’ll get competition going. The monolines are a non-issue for the banks.

  18. The only constant in this industry, is change!
    I remember thinking that back when CIBC bought FirstLine.

  19. CIBC is not the first bank to shed its Broker Originated Mortgage program. Brokers still need to clean up their actual/perceived “used car salesman” image or there will be more bank withdrawals from this venue.

  20. CIBC executives acknowledged during quarterly conference call today they are considering sale of Firstline unit. The bank said Thursday the efforts to sell FirstLine are part of a bid to bring mortgage sales inside branches. “Until a strategic decision is made, we will continue to originate new mortgages in the FirstLine channel” CIBC said.

  21. Yes because bank salespeople who try to sell unsuspecting customers posted rates are so much more reputable (since we’re making stupid generalizations).

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