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Xceed is a specialized
single-family, residential mortgage lender, focusing on a rapidly growing sector in the
Canadian mortgage market
Financial
Mortgage Lending
(XMX-TSX)
Xceed Mortgage Corp.
18 King St. E., 10th floor
Toronto, Ontario MFC 1C4
Phone: 416-364-7944
Ivan S. Wahl
Chairman and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
July 14, 2005
BIO:
Ivan S. Wahl
Chairman and Chief Executive Officer
Mr. Wahl has approximately 30 years of experience in the residential mortgage business and
has played a leading role in the development of the Canadian mortgage broker channel and
the mortgage backed securitization industry in Canada. He founded FirstLine Trust Company
in 1985 and served as its Chairman and Chief Executive Officer; later selling it to
Canadian Imperial Bank of Commerce, where it was renamed CIBC Mortgages Inc. From 1995 to
2001, he was Vice Chairman and Director of CIBC Mortgages Inc.
CEOCFO: Mr. Wahl, will you tell us about your plan when Xceed
began and how has that developed?
Mr. Wahl: “There has been new ownership and new
management of the company that started in April of 2002. The company is about eight years
old. There was a dramatic shift in both the direction and the vision of the company. The
sub-prime mortgage business in Canada is developing very quickly and it is still very much
in its emerging stages, unlike the United States where the sub-prime mortgage business has
been around for 25 years. There is a tremendous opportunity for our company to have
dramatic growth, simply because we are taking advantage of an under-serviced market in Canada.
We started in April of 2002, and here we are three years later where we have taken the
asset base from $125 million to $1.3 billion, as well as having significant growth in
earnings and earnings per share.”
CEOCFO: How do you reach
your potential customer?
Mr. Wahl: “We originate the bulk of our mortgages
through the mortgage brokerage channel. In Canada, mortgage brokers originate about 25% of
the entire origination market, and this is a channel we know very well. At the same time,
we have referral programs in place with five of the top six banks in Canada. They refer
their mortgage clients that do not meet the bank’s underwriting criteria to us,
because these same banks have roughly 75% of the origination market. This is a potential
area of explosive growth for our company.”
CEOCFO: Why do the banks
refer their clients to you and what do they receive in return?
Mr. Wahl: “These are large banks that are virtual an
oligopoly in Canada; they control about 85% of all of the financial assets in Canada. Many
mortgage customers just do not meet the auto adjudicated credit standards that the banks
have. As a result, the banks are able to retain the remainder of the relationship with
these customers. Other financial services may be significantly more profitable to them
such as credit cards for example. Rather than saying ‘no’ to their customers and
potentially losing these other banking relationships, they simply refer these customers to
us for the term of the mortgage. We do compensate them and give them referral fees but the
referral fees that we pay to them are a minor incentive. Canadian mortgage terms are a
relatively short three to five years. During that three to five year period, they are very
likely to have their credit rehabilitated and as a result, they may be qualified for more
competitive rates with the same big banks. It is a symbiotic relationship.”
CEOCFO: After the three
to five years, are the mortgages then re-negotiated?
Mr. Wahl: “Yes, even though the mortgages are amortized
over 25 years. At the end of the term, technically it is balloon maturity. What happens in
99% of the cases is that there is a renegotiation of the interest rate on the mortgage at
the end of the term.”
CEOCFO: Is there a
geographic focus for you in Canada?
Mr. Wahl: “We are national in Canada. We do business in
all of the ten provinces and in both urban and suburban areas throughout Canada.”
CEOCFO: Do you focus on
single family homes?
Mr. Wahl: “We are primarily in the single family home
area. All of our mortgages are residential mortgages. We do not do any commercial
mortgages, although we do some multi-family business in the form of condominium high rises
for example, but that is a small percentage of our business.”
CEOCFO: The sub-prime
market can be more risky; how do you minimize the risk for Xceed?
Mr. Wahl: “The Canadian mortgage market is significantly
less risky as a whole than the U.S. market. Defaults and losses in the prime business is
approximately one quarter what they are in the United States. The reason for that is that
I believe that Canadians are more conservative and as a result, they tend to have more
responsibility in terms of keeping their payments up to date. At the same time, we
generally have very lender friendly laws throughout Canada. That means that the lender has
a big stick. If you do not make your payments on time, we do not have to wait for six
months to a year to sell the house. In the province of Ontario, there is legislation
called power of sale legislation where a lender can actually sell the house within
forty-five days of missing one payment. If there is any deficiency on the payment, in
terms of paying off the mortgage, we then can sue the individual and garnish his wages for
any deficiency on the mortgage. The combination of a conservative and very rigorous
underwriting process as well as lender-friendly laws for people that do default, make for
significantly lower default and loss rates than in the United States. In Canada, we did
not even call it a sub-prime market; to our customers we called them non-conforming or
non-traditional mortgages. They literally are just below the bar that big banks have in
terms of underwriting mortgages. We take on a little bit of extra risk, but have an
interest rate that is between one and two percent higher than what the banks are charging
for their mortgages.”
CEOCFO: What do you do
with the mortgages?
Mr. Wahl: “We are a ‘securitizer’. This
company and a predecessor company that I started in 1985 were the first companies in Canada
to get into the mortgage securities business. We issued Canada’s first mortgage
backed security in FirstLine Trust Company in 1985. This is an area of expertise that our
company has. We think it is a sustainable competitive advantage, that we securitize these
mortgages by tapping the part of the market, which we call the commercial paper market.
The Commercial paper market in Canada is a deep and liquid market of over $100 billion
dollars in size. We sell our mortgages into the commercial paper market on a weekly and
monthly basis.”
CEOCFO: Do you have
offices throughout the nation and is it electronic?
Mr. Wahl: “It is all electronic. All of our underwriting
is done in one location in Toronto. This gives us significant flexibility because we
really can operate on a national basis without maintaining premises. We have sales people
who work from their laptops in their cars throughout Canada. Of our 75 employees, about 65
would work out of our Toronto head office and other people are in the field. We do not
maintain premises in those other provinces.”
CEOCFO: What are your
challenges?
Mr. Wahl: “We have a growing and profitable market. We
expect over time that there will continue to be inroads into this very lucrative market by
other companies. Our main competitors are U.S. companies that have decided to come to Canada;
companies like GMAC, Residential Funding Corp. and Wells Fargo. None of these companies
has attained the kind of market share that we have. We hope to develop this market
quickly. We think that the untapped market in Canada is about $50 billion dollars in size.
We are currently at $1.3 billion, so we have some significant first mover advantages and
we plan to exploit those advantages.”
CECFO: Why should
potential investors be interested, and what should they realize about the company that
they might not see at first?
Mr. Wahl: “One of the main things that investors should
look at is that today our stock is trading at a PE multiple that is around twelve times.
When we compare that to our competitors in this market place who are also public mortgage
companies, they are trading at a range of fifteen to twenty five times. We think that our
stock is a screaming bargain. The vast majority of investors have not really understood
the story.”
CEOCFO: Any final
thoughts for our readers?
Mr. Wahl: “When U.S. investors think about mortgages and
especially sub-prime mortgage companies, they should realize that the Canadian mortgage
market is dramatically different from the U.S. Generally, the bulk of U.S. mortgages are
still 30-year fixed rate mortgages. We have not had 30-year fixed rate mortgages in Canada
for 30 years. All of the mortgages are much shorter. For example, we only sell a three and
five year term mortgage. The reason that this is important for the investors is that in
the U.S. and Canada, mortgage companies account for the profits using ‘gain on sale
accounting’, which means that you present value of the cash flows that are associated
with the mortgage. One of the significant differences in Canada is that when we present
value, the cash flows are for three or five years. Those cash flows are far more
predictable and far less volatile than when you look at a U.S. situation where you present
value in cash flow for thirty years simply because even a one percent change makes a
dramatic change in terms of the present value of those cash flows. In the U.S., generally,
mortgages can be prepaid without any penalty. As a result, investors in mortgage companies
have a certain amount of volatility of earnings again because the underlying assumptions
on prepayments can be very volatile. Our situation in Canada is dramatically different.
Mortgages in Canada cannot be paid off without a penalty, so all of the mortgages we have
are closed mortgages where a borrower can only pay off the mortgage if he pays off his
house but with a significant prepayment penalty. This takes away any frivolous refinancing
and therefore the Canadian earnings are significantly more stable and predictable than
cash flows in the United States.”
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