Five years after the financial crisis, subprime mortgage lender Xceed Mortgage Corp. is on the verge of being acquired.
The transaction comes after Xceed, originally known for lending to high-risk homebuyers, attempted to retool just over a year ago and offer more traditional prime mortgages.
But just a few months later management initiated a strategic review and left every option on the table – from applying to become a bank, to a sale or a merger, to winding the company up and returning money to shareholders.
Twelve months later that review has come to an end and Xceed will be sold to MCAN Mortgage Corp, which is known for investing in things like portfolios of mortgages, for $53-million.
Despite its best efforts to compete in the traditional mortgage market, Xceed just couldn't gain much traction. Part of the problem came from stiff competition. When the company reported quarterly earnings earlier in March, management said all of its rivals were fighting for market share, forcing lenders to lower their mortgage spreads and cough up bigger broker commissions.
But Xceed also had problems funding itself. In the old days it relied on the asset-backed commercial paper market. When that blew up at the height of the financial crisis, the company ran out of ways to borrow. And the market never really came back. "It's highly unlikely that a securitization funding solution will make itself available in the near future," chief executive officer Michael Jones said in an interview. "That part of the business model remains broken today."
The acquisition beefs up MCAN's mortgage origination division, and Xceed comes with approved lender status from Canada Mortgage and Housing Corporation, which will allow MCAN to ramp up its offerings.
However, MCAN is buying the shell of what Xceed once was. From 2002 to 2007 the company's assets under administration surged to $2.7-billion. Today, its mortgages amount to just $800-million. Xceed also once traded as high as $10 a share back in the heydays of 2006, but the stock hasn't been north of $2 since, and the acquisition price came in at $1.75 per share.
Still, Mr. Jones said this deal offered shareholders a liquidity event. He and his team truly explored other options such as becoming a bank or winding up, but both options came with problems. Regarding a bank licence, he said the amount of time involved "in acquiring such licence, the amount of capital that you are required to commit in that process, and the costs – particularly in the early years – of becoming a bank, would not have been in the interests or met the appetite of our shareholders."
As for the wind-up, it was rejected because it came with an "enormous amount of uncertainty," most notably no concrete timeline, so no one knew how long it would take.
(Tim Kiladze is a Globe and Mail Reporter.)
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