Xceed_MCANXceed Mortgage has been reinventing itself ever since the financial crisis, when liquidity dried up and killed its bread-and-butter business: uninsured non-prime mortgages.

Since then, Xceed has offered mostly plain-Jane insured mortgages…until now. The company has launched a new X-Series mortgage. It’s an uninsured product that competes with the likes of Home Trust, Equitable Bank and Optimum Mortgage.

The launch reflects both Xceed’s end goal (to be more than a run-of-the-mill insured lender) and the capabilities of its new owner, MCAN.

 

Some History

mortgage-marginsMCAN purchased the 17-year-old lender last summer. That breathed new life into Xceed, thanks in part to MCAN’s funding capability and expertise. Instead of selling mortgages at thin margins to all the usual buyers (mostly banks), it gave Xceed access to the balance sheet/capital of MCAN.

(MCAN is an OSFI-regulated, deposit-taking institution that’s also a mortgage-backed securities issuer. It also owns part of MCAP, (the 6th-biggest broker channel lender).

By purchasing Xceed, MCAN instantly got a CMHC-approved lender with underwriting and portfolio management expertise. Xceed also had a valuable CMB allocation but it had to give that up after MCAN acquired it (due to CMHC rules against common ownership of multiple allocations).

Having its own mortgage originator was a strategic benefit for MCAN. It:

  1. Meant MCAN no longer needed to rely on others for mortgage distribution
    • Whereas it previously purchased the majority of single-family mortgages from MCAP, the acquisition of Xceed diversified MCAN’s source of mortgage investments.
  2. Gave MCAN more control over the types and quality of mortgages funded on its balance sheet
    • This is an important concern for regulators.
  3. Helped MCAP meet its obligation as a regulated Mortgage Investment Corporation (“MIC”)
    • Being an MIC gives it special tax status, but that comes with certain requirements. In MCAN’s case, its 5:1 assets-to-capital ratio requires that two-thirds of its balance sheet be comprised of residential mortgages (including construction financing).

The X-Series

Regulations-for-Mortgages-TighteningThe timing has worked out well for MCAN. OSFI’s B-20 guideline has tightened conventional lending and created a larger alternative lending market. Xceed can now hone in on this market with its new X-Series mortgage.

These are the specs for that X-Series product:

  • Loan-to-value (LTV): Up to 80% — even on high-rise condos — and up to 75% on rentals. (MCAN is OSFI regulated, so Xceed, as a wholly owned subsidiary, can’t originate mortgages with LTVs greater than 80%.)
  • Minimum Credit Score: None
  • Fee: 1% of loan amount
  • Prepayment privileges: 20% annually
  • Optional payment increase: 20% annually
  • Property-tax holdbacks: None
  • Early termination: No restrictions (although a standard pre-payment charge applies)
  • Required documents: Will consider invoices/contracts and/or 6-12 months of bank statements to prove income, in addition to a stated income declaration and business licence or HST registration
  • Extra features: Free home warranty; no monthly PAC fees or maintenance fees like some non-prime lenders; fees are added to the mortgage amount instead of deducted from it; allows second mortgages up to 90% LTV.

Xceed also pays brokers above-average compensation to sell this product. Some might wonder if this will cannibalize MCAP’s Eclipse volume, but Xceed is intentionally targeting different brokers than MCAP. Moreover, if a non-prime deal is already committed at MCAP, Xceed will not approve it.

Risk Mitigation

risk-and-securitization-guaranteesLaypeople often wonder how lenders can consistently make money with higher-risk uninsured lending. It boggles their minds that some non-prime lenders can maintain per-mortgage loan losses that are comparable to the major banks.

It boils down to properly valuing the property and ensuring the borrower has the willingness and ability to service the debt, says Michael Misener, MCAN’s VP and Chief Investment Officer.

“The majority of our loans that go bad are due to life events,” he says. “The biggest one is divorce, then major illness and loss of a job. As a regulated entity, reputational risk and fraud risk is much greater than credit risk.”

For uninsured lending, Xceed relies more heavily on the borrower’s “story.” For example, did he or she run into credit problems because of a major illness or unforeseen job loss?

Xceed has also developed a computerized credit assessment matrix. That lets it safely take on modestly more risk than some competitors (on either the credit side or the LTV side), it says, while ensuring full compliance with OSFI’s B-20 Guideline.

Target Market

alternative-lendingThe new X-Series product is targeted at three specific customer groups:

  1. The gainfully employed with fully verifiable income (by insurer standards) but with bruised credit due to a life event (credit scores in the 500s are allowable in many cases).
  2. Self-employed borrowers who cannot confirm income through traditional means.
  3. Professional landlords with good credit but who exceed concentration limits (i.e., the maximum number of allowed properties/units) with other lenders (they can also be self-employed).

Xceed gives MCAN a fresh path for growth in the uninsured market. The company is currently targeting a few hundred million as its alternative originations goal (for both Eclipse and the X-Series product). In time, we suspect that number should scale.

“The ultimate goal would be to use X-Series to generate deals for the insured side,” Misener adds.

That’s the proven model used by the granddaddy of the alt. space, Home Trust. And we all know how that success story panned out.


Rob McLister, CMT (email)