CIBC's FirstLine may be gone, but for MCC, it's business as usual, says President Eddy Cocciollo. Competition between broker networks is also staying put. In fact, it's likely to grow in 2013. Still, in this Q&A -- and in keeping with the season -- Cocciollo stays above the fray to offer his take on a transformed mortgage market and the changes it will demand of brokers and networks, alike.
Cocciollo is also candid about CIBC and its decision to close FirstLine, a move with ramifications for all broker networks.
CMP: What was the reaction within MCC to CIBC’s decision to wind down FirstLine?
Cocciollo: The network’s reaction was no different then the overall industry reaction: Surprise , but not shock. What I mean by that is we all saw FLM being a leader in the mortgage broker space for so long, not having FLM as an option just seemed implausible. However, with all the changes in the global lending rules and with reduced mortgage margins, we all knew that something of this magnitude could happen.
But the decision that CIBC made was solely a strategic lending decision. The Mortgage Centre business and the network continue to prosper as part of CIBC.
CMP: Some have suggested all of the big banks now in the broker channel intend to get out within the next five years. First, do you agree? Second, what does that say about broker commission levels and the channel’s competitiveness?
Cocciollo: Each major bank has its own philosophy on lending and the broker space. Scotiabank and Toronto-Dominion have been committed to brokers for a long time and continue to fund billions of dollars in this space, while attracting new banking clients. I don’t see why they would want to change anything. Other big banks have chosen a different strategy. Instead of directly dealing with brokers, they choose to invest via monolines, essentially investing in the broker origination business. So really it’s the lenders’ approach to the broker channel that may change, but I would say that it is difficult for any lender to make the decision to “get out” entirely when brokers represent such a huge slice of the mortgage origination pie for Canadians.
Compare the full costs of the various origination channels, such as branches, brokers, proprietary sales forces, monolines. I am not sure that the costs are all that different. Some, however, such as commissions are more apparent than others, than say bank branch overhead. I think the most likely scenario will be similar to today, with banks competing for broker business, both directly and indirectly, which is good for the broker and consumer.
CMP: Is there a danger of MCC brokers relying on CIBC and President’s Choice Financial product instead of monolines?
Cocciollo: What danger would there be? The MCC network has an advantage, in terms of choice for its customers, over all our competitors. The choice happens to be one of the most recognized banks in Canada. Out of our top 3 lenders, two of them happen to be monolines. If CIBC or PCF is the best lender for their client in certain situations, only MCC can accommodate.
CMP: Broker network consolidation is on the minds of many. Is this really the direction the industry is going in 2012? How many networks do you expect will disappear in 2013?
Cocciollo: The consolidation rumours are being blown out of proportion. The success of the bigger networks such as MCC is that they have established themselves in the market; each proving its value proposition to attract and retain brokers that like that model. The way it happens now is healthy for the industry. It forces the national networks and independents to invest in their business to be competitive, which strengthens the overall industry and ultimately the consumer will see a better product.
CMP: Brokers were again weighing in on MortgageBrokerNews.ca about how high commission splits for agents are unsustainable and don’t allow brokerages to really train and bring value. What are your thoughts on that key issue?
Cocciollo: As a leader in one of the largest brokers in Canada, I constantly look for ways to add value to my network, but still keep my shareholders happy. I think we all understand brokerages are working with thin margins and we need to be as efficient and effective as possible with our brokers, lenders and partners Our model is a little different: we don’t take a cut of the commission, but like everyone else, we are susceptible to volume decreases. At The Mortgage Centre we did talk about introducing a full-service brokerage with a higher split, but our owners didn’t want us telling them how to run their businesses. Our model has been the same for over 20 year and has proven to be sustainable and of value. In a challenging economy other brokerages may not be as well prepared to respond to changing commission structures.
CMP: Recently some high-level brokers packed up and moved to different broker network. Will we see more migration and why?
Cocciollo: Well, I can’t speak for other brokerages but I can tell you MCC is still going strong and we just had a record-breaking year. We keep attracting quality brokers and have been growing year after year.
One of our attractions is that with a MCC franchise, the owner has a protected territory. Because we respect our agreements, this limits us at times from accepting quality brokers from a competitor. Naturally, though, when someone leaves MCC it also leaves a territory, which we have been consistently successful in backfilling. Brokers will leave and they will come. There are many different reasons why brokers leave and are attracted to certain networks. So now the question should be how does MCC retain our brokers and agents?
The simple answer is and what we are most comfortable investing in is to offer as many tools and value-added products as possible, so the broker and agents can see the value. I can tell you that, naturally, MCC has lost a few brokers over time, but not because we could not compete with some compelling business offer. Recently we chose not to compete with a competitor’s un-economical short-term cash offer. The ironic part is that over time it would have been advantageous for the broker to stay. Simple math really, but it’s like winning cash for lif – do you want the $1,000 a week or the big upfront payout even knowing taking the cash upfront casts aside hundreds of thousands over time.
CMP: Broker commissions have come under the microscope with two lenders deciding to cut them. Will broker commissions come under greater pressure and why?
Cocciollo: The simple fact is that since the financial liquidity crisis of 2009, lenders have not been able to consistently achieve their historical mortgage profits. So, naturally, they are seeking to reduce costs such as the two lenders you are referring to that cut commissions by 5 bps. According to my quick calculations, the average agent (assuming $60K in commissions) will be out of pocket almost $4k a year assuming they did 100 per cent in 5 year mortgages with those two lenders.
While hurting somewhat, it’s just not significant enough to really make a massive difference for the individual broker, especially if better margins for a lender, leads to more investment, and happier shareholders. We need our lenders to be happy. But if lenders start to take down commissions say by 20 per cent or more, then that would change the landscape significantly. I don’t see that happening, though.
CMP: Volume pooling has also been scrutinized and criticized by some lenders as an impediment to efficiency. Do you support volume pooling and why or why not?
Cocciollo: Some national brokerages have these so called “central desks” allowing the one-deal-per-year agent to get all the advantages that the loyal broker got. I even hear about brokers who are used as “the poolers” but don’t even know who is sending the deal through in their names.
It goes against everything “volume” bonuses were created for. Now, if I’m a broker who manages a small team and I used my name to facilitate the file with that small team in MY office, then, yes, I think that it is effective pooling. I’m glad to see that the lenders are looking at this more closely.
CMP: Looking at the banks and the new tighter lending guidelines, where is the broker channel headed? Back to alternative lending?
Cocciollo: Alternative lending will fill some of the holes the government rules have created. This is a good thing: borrowers who can’t qualify for A business have the opportunity to borrow, but will have to pay a premium to do so; hopefully with the option that if they improve their situation they will get to the A side eventually.
This is healthy, responsible lending: The client gets what he/she wants, the broker works for his/her commission and the lender’s risk is mitigated correctly. Everyone wins. In saying this, we need to ensure our brokers are trained correctly in identifying these clients and offering the alternative solution to A lending, especially where private lenders are being used. Private lending is ramping up in our space.
Unfortunately we are seeing missteps and mistakes that are costing our E&O insurance providers some grief. As an industry, we need to tackle this now before it bites us. AT MCC we are on top of it and will be ensuring our E&O rmains intact and affordable.
CMP: Will Scotia ultimately keep ING in the broker channel?
Cocciollo: I think Scotia understands the broker space very well, but you will have to ask themselves, “Will ING will continue to fill a gap that Scotia can’t?”