The acquisition of mortgage lender Cervus Financial Corp. by Macquarie Group, an international financial services firm based in Australia, is an indication that foreign companies continue to be interested in capturing a slice of Canada’s red-hot mortgage lending and brokerage business.

“This is a growing market, but one that’s still dominated by the banks. We think there’s room for new entrants,” says David Morrissey, a division director of the mortgage division of Macquarie Bank, a subsidiary of Macquarie Group. “We think there’s an opportunity to grow market share.”

Morrissey, who is based in Sydney, has been working in Toronto since May to help in the transition.

Macquarie Group, through a Canadian subsidiary created for the deal, and Cervus Financial Group, the Toronto Stock Exchange-listed entity that owned Toronto-based Cervus Financial Corp., finalized the $12.5-million deal in July after receiving regulatory approval. Cervus Financial Group has been delisted and is being wound up.

In Cervus, Macquarie has purchased a two-year-old mortgage originator that has approximately $1.2 billion in assets under management and sales arrangements with about 250 mortgage brokerages and 3,000 individual agents. Cervus boasts that it offers consumers no-haggle rates lower than those posted by the big banks, and that it can approve a mortgage in minutes.

Cervus also offers a trailer-fee model of compensation, in which brokers receive commissions each year the mortgage stays with Cervus, including a higher commission on renewals instead of one large, up-front payment when the mortgage is signed. If the borrower stays with Cervus over the entire life of the mortgage, the broker can make much more than in an arrangement in which he or she is paid up front solely.

Macquarie, which has mortgage-lending subsidiaries in Australia, the U.S. and Italy, uses a very similar trailer-fee model to compensate brokers. And like Cervus, Macquarie, which is primarily an investment bank, won’t compete with its broker partners in terms of distribution — neither company has retail mortgage lending outlets.

“There were other potential acquirers, but we thought Macquarie was a great fit,” says Cervus Financial Corp. CEO Grant MacKenzie, who was one of the founding partners of the firm.

The deal was announced in June, at the same time as Cervus Financial Group formally filed for creditor protection under the Companies’ Creditors Arrangement Act. The company had run into trouble, it says, because of rate compression between what it was paying to fund mortgages and the rate it was receiving on the mortgages, a problem affecting the industry as a whole. The fledgling firm began to feel a cash squeeze and started seeking a buyer or strategic partner. The insolvency was done, MacKenzie says, to facilitate the deal and so Cervus could be bought as a going concern.

At the same time Cervus was looking for a partner, Macquarie was seeking opportunities to expand its mortgage business internationally. “Cervus has an existing mortgage flow and an ongoing relationship with a mortgage broker network. For us, it’s a case of plug in and the business is already running,” Morrissey says. “It gives a three-year head start, as opposed to a greenfield approach.”

Worry Evaporated

Macquarie’s purchase of Cervus’s business alleviates the Toronto company’s capitalization problem and reassures its network of brokers, MacKenzie says.

“If you’re a mortgage broker, you want to be confident that the lender will be around for the long haul to pay the trailer fee,” he says. “With the Macquarie acquisition, that worry has evaporated.”

Macquarie is retaining Cervus’s management team, led by MacKenzie, whose new title will be division director of Macquarie Bank. Cervus will retain its brand name for now, Morrissey says.

In mid-August, Michael Barrett, Macquarie’s executive director, will relocate to Toronto to head Macquarie’s North American mortgage business. Its U.S. division is based in Jacksonville, Fla.

MacKenzie will report to Barrett.

The Canadian Institute of Mortgage Brokers and Lenders predicts the domestic mortgage market will grow to $725 billion in 2006, up 10% from 2005. CIMBL says one-quarter of Canadian borrowers now use a mortgage broker when placing a mortgage with a lender, up from less than 10% six years ago. Most observers believe the mortgage brokerage market in Canada has lots of room for growth. In the U.S., approximately 70% of mortgages are placed through brokers.

Foreign-based financial firms have taken notice. In November, GE Money Canada, the Toronto-based subsidiary of U.S. utility giant General Electric Co., began offering mortgages through brokers. Last summer, Vancouver-based HSBC Financial Corp., a Canadian subsidiary of global banking giant HSBC Group, bought Toronto-based mortgage broker Invis Inc. And Wells Fargo Financial Corp. Canada, based in Toronto, began providing mortgages through mortgage brokers in 2003; it opened its own retail outlets in 2004.

@page_break@“Macquarie sees an opportunity here,” says Jim Murphy, a spokesman for CIMBL. “The theme in our industry is ‘more competition is better’.” IE