firstlineThe former No. 1 lender in the mortgage broker market is closing its doors to new business as of July 31, 2012.

This signals the end of what has been months of uncertainty about FirstLine’s fate.

In some ways, today’s news also marks a moment of truth for the broker market.

FirstLine, a division of CIBC, was put up for sale earlier this year. (See: CIBC to Sell FirstLine)

Unfortunately, despite garnering some interest from prospective buyers, a deal could not be closed. CIBC concluded that, “it is preferable to cease originations in FirstLine.”

A source familiar with the discussions told CMT:  “The buyer struggled to come to a deal that made sense” so CIBC chose to let FirstLine “die a natural death on its own.”

We hear that senior CIBC management reportedly decided not to proceed with the deal over the weekend. They apparently had a lack of confidence in FirstLine’s future earning potential (which CIBC reportedly would have got a cut of). In addition, FirstLine had relatively low wind-down and severance costs, limiting the impact of this decision.

“This is obviously a huge loss,” said Bob Ord, one of FirstLine’s founders. “FirstLine has been the staunchest broker supporter for almost 25 years.”

Ord cited questionable profitability as FirstLine’s undoing, saying debates on broker vs. retail profitability have been ongoing for years.

For its part, CIBC sent CMT some official statements clarifying its position. They said:

Today’s announcement is aligned to CIBC’s strategy to emphasize those channels where we have a greater opportunity to meet more of our clients’ needs, and refocus our mortgage activities on our CIBC branded channels moving forward.

“…It is important to note that we were selling only the origination capabilities of FirstLine – the book of business was to remain with CIBC.

CIBC/FirstLine then thanked brokers for their “strong support over the years.”

That support was indeed strong, with as many as one in three broker mortgages going to FirstLine at its peak in Q3 2008 (according to sources). Just 12 months ago, FirstLine was the top broker lender by market share.

CIBC-BankBut then, CIBC had a radical change in distribution philosophy. It began last year when management decided that it wanted “deeper relationships” with its mortgage customers. CIBC believes that will generate more cross-sales, higher net interest margins and “higher levels of client satisfaction.”

“Our FirstLine brand does not support this strategy…” CIBC told the Financial Post today.

“…The broker channel resulted in primarily single product client relationships, thin margins and lower levels of client satisfaction given the transactional nature of the relationship.”

According to two top-level industry executives we spoke with, both the finality of this all and CIBC’s decision might now make other lenders re-evaluate the economics of the broker channel. They feel that it’s too easy for brokers to qualify for volume bonus nowadays. That, plus higher funding costs (both in the financial market and internally in banks’ treasury departments), fierce pricing competition, costly broker incentives, and other factors have squeezed profitability on broker-originated deals.

Fortunately, the majority of lenders in the broker channel are profitable and aren’t going anywhere. In the last year or two we’ve also seen brand new lenders enter the space–each of which add important options for consumers who deal with brokers.

“Now more than ever, mortgage brokers provide choice and a valuable service to Canadian borrowers,” says CAAMP President Jim Murphy, and that value hasn’t changed.

********

Today’s news will have other outcomes as well…

For FirstLine employees:

Many (but not all) production, adjudication and product group employees have shifted (or will shift) to other roles at CIBC. Most of FirstLine’s sales staff will be let go and may receive packages as early as Tuesday, according to folks we spoke with at FirstLine.

As a side note, FirstLine BDMs were some of the finest in the business. The ones we know were highly experienced, responsive and loyal. They will likely make attractive acquisitions for competing lenders.

For FirstLine brokers:

Many will be wondering about the fate of their basisPOINTS and POINTS. These are incentives that some brokers have built up over more than a decade. We’re hearing that FirstLine will make an announcement on this by next week or sooner. The speculation is that brokers will be paid out for these points.

For existing FirstLine clients:

It will be business as usual until renewal nears. At some point before maturity, customers will be contacted by CIBC’s retention team, which CIBC has reportedly been building up. CIBC will then try to persuade FirstLine customers to renew with CIBC, likely using below-market rates as a carrot in many cases.

So far, CIBC says its retention efforts have been “getting good traction and results are tracking above internal expectations.” (i.e., greater than its 50% client retention target.)


Rob McLister, CMT