When Christine Wade secured a mortgage for her little dream house in Peterborough, Ont., she thought her family had finally found a way out from under their bad credit rating.
For three blissful years, she was right. But when the mortgage - which carried a 9 per cent interest charge - came up for renewal, she received a letter from lender Xceed telling her that the company wasn't interested in striking a new deal.
She's one of the many customers who took advantage of the company's loose lending policies prior to 2008, when it took on home loans that most major mortgage lenders would not. But Xceed's unwillingness to renew led to a devastating result for Ms. Wade: Unable to get financing, she lost her home. "We did everything right, we made our payments when we were supposed to. But now we are living in a rental and dealing with all of the fallout from the foreclosure."
The subprime mortgage crisis and ensuing credit crunch spurred the long decline of Xceed. On Thursday, the company reported a $17.6-million loss for fiscal 2010, replaced its CEO and said it would no longer accept mortgage applications for new customers. Its shares fell 17.4 per cent, to 71 cents. In 2006, they traded at more than $10.
The move marks a new chapter in the subprime story, which caused major damage to U.S. financial institutions and the housing market but has been more contained in Canada. Alternative mortgage providers such as Xceed have found it difficult, and in some cases impossible, to get the cheap financing they need to continue lending profitably.
New CEO Michael Jones, who had been Xceed's chief operating officer, said the company has worked hard to find alternatives or new mortgages for its borrowers and will continue to do so.
"Regrettably, and believe me, we feel this, it is the case that on occasion there are people who have had good payment records who have been unable to refinance their mortgages despite our best efforts," he said. He said the firm does not know how many of its mortgages have been foreclosed.
Xceed has been on a roller-coaster ride since the subprime meltdown. In November it abandoned its ambitions to turn itself into a bank, which would have allowed it to gather deposits. It has cut its staff to about 20 employees, down from about 50.
In many ways, its troubles are a side effect of one of the darkest chapters of the credit crisis for the Canadian markets: the collapse of the market for non-bank asset-backed commercial paper (ABCP), which erupted in 2007. Xceed's key funding line (a trust called "QSPE-XCD") was provided by a firm at the heart of those troubles, Coventree.
When non-bank ABCP froze up, Xceed found itself unable to renew the mortgages of customers whose mortgage money had come from that trust. If their mortgage came up for renewal and they didn't have enough equity or a solid enough credit rating to get a new mortgage from a bank or another lender, they'd often wind up in foreclosure. The problem was compounded by the fact that many subprime lenders were pulling out of the market.
Xceed worked with Coventree and the bondholders of the trust and was able to arrange in 2009 for permission to renew mortgages again. But that arrangement ended this past summer, Mr. Jones said.
"There were some issues related to legal documentation that did not allow the trust to continue to process renewals beyond that point," he said. "And so we had to stop again."
As a result, foreclosures picked up again, although Xceed is taking a number of other actions to try to help borrowers who are up to date on their payments but having trouble renewing, Mr. Jones said.
In the meantime, Xceed sought to transition away from being a subprime lender toward being a "prime" lender, selling mortgages that qualified for government insurance and could be sold to the Canada Mortgage Bond program.
That allowed it to obtain funding, but it meant competing with the major banks, which can use their large stable of deposits to fund their mortgage loans. Xceed's cost of money was still more expensive.
As a result of the switch to prime lending, Xceed's interest margins - the spread between what it cost Xceed to get money and what it could charge homeowners - were decimated. "And the fact is, in the insured mortgage market, the spreads are not huge by any means anyways," said one analyst who followed the company.
Mr. Jones said competition among big banks for mortgages has heated up since the summer. That's erased Xceed's hopes of turning a profit.
The company continues to sell mortgages to Merrill Lynch, and one source familiar with the company said Xceed is trying to negotiate a new deal with Maple Bank, the local arm of Maple Bank GmbH, that might allow it to begin originating mortgages again.