Xceed Halts Broker Originations

XceedXceed Mortgage is halting new mortgages from the broker channel.

While disappointing, this news isn’t utterly shocking. It’s been a rocky road for Xceed ever since the credit crisis began in 2007. (See this story, for example.)

The numbers say it all. Xceed lost $17.6 million last year and its 4th quarter mortgage originations plummeted 45%.

Xceed Chairman Ivan Wahl made these statements:

  • “As it turned out, the tightness of the credit markets, the cost of financing new mortgages and renewals, and intense competition in originating insured mortgages through the insured mortgage broker channel increasingly affected us throughout the year and particularly in our fourth quarter."
  • The lack of “availability of credit at reasonable costs for new mortgages and mortgage refinancing” was a key reason for this decision.
  • “The spreads available on insured mortgage originations through the broker channel have significantly tightened and the company has seen declines in its mortgage volume.”
  • “We also have seen a reduction in the number of mortgage aggregators in the market who are willing to purchase mortgages at competitive rates.” (Xceed lost its key aggregator, Deutsche Bank, last year.)
  • “Effective January 14, we will suspend the origination of insured mortgages through our network of external brokers.”

In our view, this all largely boils down to two things:

  • Xceed not having access to enough low-cost capital
  • Xceed trying to sell products that were purely vanilla.

Essentially, Xceed had no differentiation that would allow it to compete with the product breadth and massive balance sheets of banks and its more established competitors. Furthermore, Xceed’s reliance on the Canada Mortgage Bond Program for its primary capital source shows just how tenuous that strategy can be.

The company said it will keep managing its $1.6 billion of mortgages and assets and “will continue to offer renewals and refinancing through (its) internal sales group.”

Effective January 12, 2011, Michael Jones replaces Wahl as Chief Executive Officer. Wahl “will remain as Chairman and as an officer of the company, responsible for strategic corporate development."

Unsurprisingly, the company said its bank application will “remain on hold.”

Jones said simply: “2010 didn’t turn out as we planned.”

    I have been personally affiliated with Xceed, and I would like to say in confidence that I find that any other lender or brokerage would be lucky to hire any ex-Xceed employee.
    This group of people is very highly skilled and with hard work ethics.
    Starting from the administration, underwriting and sales, the former employees of the company would be a strong asset for any employer.
    This unfortunate Xceed situation has led to a number of very good professionals on the job market. My recommendation to anyone who is looking to recruit, DO NOT PASS THIS OPPORTUNITY!!!

  2. Rob, Very interesting and compiled write up. Any idea what their current mortgage default ratio is? Percentage of their overall mortgage portfolio that is sub-prime product?

  3. But why should govt. involve in RE business. There is no CMHC for stock, mutual funds, currency, gold or any other investment. Let bank,buyer or seller take all the risk.
    Why do taxpayer involved in RE transaction?

  4. Hi Banker, Xceed said its average default rate was 3.52% in 2010 but that includes their subprime business. Xceed’s prime default rates are much lower and if I can find a source for that data I’ll post it.
    Interestingly (or sadly) most of Xceed’s uninsured defaults happen at maturity from what it calls: “quality customers with good repayment records.” These people simply had no where else to go when Xceed was unable to renew them.
    Almost all of Xceed’s recent business has been prime, but overall they still have a whack of pre-crisis subprime assets on the books. I don’t have the exact ratio available at the moment.

  5. Hi Rob. Never good to see as at the end of the day it is not good for the industry. The more lenders the better and Ivan made some interesting comments about the higher costs as well as it is much harder to secure funds for mono lenders. Do you see this a possibility for anyone else this year?

  6. Wow…Rob weren’t we just gabbing about micros (mono-line, whatever) running out of gas?
    The smallest of the micros, Xceed, is all but done.
    Is this the first domino?
    The big-6, given the whining to the government, appears no longer willing to tolerate the little players. They will use their weight to influence the capital available to the micros – it only makes sense.

  7. Hi Banker, I would never rule it out. Then again, Xceed was the weakest of the weak in my view (partly because of their legacy liabilities and a humdrum product portfolio). Cheers…

  8. New story written by
    Neil Mohindra is director of the Centre for Financial Policy Studies at the Fraser Institute.
    Enough said.

  9. Effective January 12, 2011, Michael Jones replaces Wahl as Chief Executive Officer. Wahl “will remain as Chairman and as an officer of the company, responsible for strategic corporate development.”…not a good idea, Wahl, a yesterday visionary running a company hit by a sledgehammer of problems, mostly self induced. One year from now, my guess, swallowed by another B Lender. RIP.

  10. Stock debuted June 18 2004 at $5 per share, today 0.71 cents per share, down 86% since IPO, a bad investment indeed.
    Interestingly the $17 m they lost in Q4, how much of that is milking before Ivan leaves, impossible for him to allow that much money to be lost, this guy is a GURU, NO way are those losses, Ivan would have closed the doors earlier if that were true losses from the business.

  11. Who I understand his credible background is in financial regulation and thus clearly reflected in his viewpoints. Bankers or CMHC often differ in opinion to regulators and the various views expressed in this article.

  12. Could Equitable and MCAN be next? They’re much bigger than Xceed but these two are next on the list.
    The white flag is an announcement about trimming dividends. Lets see if anything happens.

  13. If the banks are truly concerned with consumer debt, why are they not talking about the highly profitable, easily assessable credit card market?

  14. Rob,
    I hear what you’re saying.
    However, their financial conditions are better guaged with income figures than share prices. Accordingly, net income from their previous year ends:
    Xceed: -3M (-17M this year end)
    Equitable: 51M
    MCAN: 25M
    All are small and thus precarious.
    Keep in mind, i’m not saying they’re in trouble. I’m saying this is the best place to detect early signs of trouble in the non-bank lending space.
    MCAN could be next, $25M isn’t much cushion in the game they play.

  15. Hi Tomas, Their profit may be smaller than a major bank for example, but cash flow is what matters. MCAP is a strong lender with strong cash flow. It is financially incomparable to an Xceed. There are far more analogous lenders you could name than Equitable and MCAP. I won’t call them out here however.

  16. Hi Tomas. I once heard a glossy coat of new bright paint cannot hide rust for long.
    I agree with you in not saying they are in trouble however the ability to access funds will be tougher in 2011 in my opnion. The big 5 are ramping up their mobile spec force so there will be less reliance on white lable. Investots are looking for bigger gains in spread which will make the mono less price competitive.
    Xceed was non competitive in price and I think that had to do with Ivan not wanting to put a low rate deal on the books where there was no money into it.
    There are some big players that are funding a large amount of volume however I wonder how long they can do this with next to no speads (or none at all)

  17. Banker99,
    You’ve hit the nail on the head. Lending at small spreads while balancing funding with mortgage securitization is a precarious juggling act. No place to raise a kid!!!
    My opinion is the micros that survive the coming market changes will be the ones that have a big brother (ie big 6 bank) providing funding.
    Quite honestly i’m fascinated that micros exist. Best of all, micros provide a great early warning on the credit market.
    It’s too bad more of them aren’t public so that we can see better what’s going on.

  18. What about Street Capital, Ivan mentions part of the reason for leaving the market space is the spreads, how are they going to survive if they rely on the same spot as Xceed the bond market for financing?

  19. Folks,
    Can anyone elaborate on what a lender receives as revenue when selling a mortgage into the Canadian Mortgage Bond system?
    I assume there’s a monthly custodial fee (for dealing with the consumer borrower) and a one time commission too. This totals maybe 0.10% of the mortgage value? Anything else?
    Unfortunately public financials lack detail about these things. Perhaps if we understood the revenue streams we could better appreciate narrow spread lending.

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