XCEED MORTGAGE. U.S. Canada Mortgage Market Comparison March 2009 Update

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1 XCEED MORTGAGE U.S. Canada Mortgage Market Comparison March 2009 Update

2 Forward-Looking And Other Statements This presentation contains forward-looking statements which reflect management s expectations regarding Xceed Mortgage Corporation s future growth, performance (both operational and financial), and business prospects and opportunities. Past results do not constitute a guarantee of future performance. A number of factors could cause actual results, performance, or achievements to differ materially from the results expressed or implied in these materials. Business prospects and opportunities considered are based on approximation extrapolation of potential market indicators. These factors should be considered carefully and prospective investors should not place undue reliance on any forward looking statements. 2

3 The Issues The U.S. sub-prime housing bubble burst in mid-2006, and the mortgage crisis has spread beyond the sub-prime market to the prime mortgage market. The U.S. housing crisis has led to plunging property prices, a global credit crunch, a slowdown in the US economy, and tightened lending conditions by banks as they react to soaring mortgage defaults, in both the prime and sub-prime markets, causing billions of write-downs. The Canadian market is far healthier throughout the same period, and will remain so in the foreseeable future. Canada has not experienced the sharp increase in arrears and defaults nor the sharp decrease in property values that has occurred in the U.S. This presentation updates the comparison of the current state of the U.S. market to that of Canada s. 3

4 Source Of The Problem Problems in the U.S. are unique to that mortgage market: The U.S. housing bubble reached its peak in 2005, and started deflating by mid-2006, and has since accelerated: Average national resale house prices grew 8.96% per annum from 2002 to 2005 but declined by 3.03% per annum from 2005 to Prices at end of 2008 were 8.61% lower over than end of In the U.S. Mid-West and West regions, average prices fell 13.4% and 27.3% year-over-year at end of 2008 from In cities like Las Vegas and Miami, average prices at end of 2008 plunged 33.0% and 28.8% respectively yearover-year. Housing starts for 2002 of 1.7 million grew to 2.1 million for 2005, an annual growth of 6.65%. Housing starts have since declined 56.19% per annum, dropping sharply to only 0.9 million for Mortgage defaults and foreclosures soared to record high levels (see Appendix B). Delinquencies in both the prime mortgage market and subprime market rose sharply. (Source: US Census Bureau, National Association of Realtors, S&P/Case-Shiller) 4

5 Reasons for the Problem The main culprits behind the U.S. sub-prime market meltdown have been well-documented by the press: Aggressive lending practices, irresponsible borrowing, creative Wall Street financial engineering, riskier product design, less onerous underwriting, etc. Mortgage interest deductibility Holding consumer credit and debt and having equity in your home is not tax efficient. Borrower friendly laws Lenders must choose to either pursue covenant or foreclose (in the vast majority of state jurisdictions). Dominance of commission based broker channel During the growth years, brokers account for in excess of 50% of new mortgage originations in the prime market and 70% in the sub-prime market. A cultural attraction to leverage The ability to easily re-establish credit after bankruptcy removes much of the stigma. 5

6 Canadian Experience Canadian mortgage market is different from the U.S.: U.S. Canada Sales price increase per annum 8.96% -3.03% 9.72% 6.50% Housing starts increase per annum 6.65% % 3.22% -2.18% Canadian Outlook: Latest outlook by CMHC: the economic downturn will result in a decrease in demand for home ownership leading to a decline in housing starts and existing home sales in This is echoed in CREA s forecast: home sales activity is expected to decline in 2009 before rebounding in 2010, average home price is forecast to decline in 2009 and stabilize in (Source: US Census Bureau, National Association of Realtors, CMHC, CREA) 6

7 Canadian Market Why is the Canadian market different? Lack of mortgage interest deductibility No interest deductibility for tax therefore no tax incentive to own Lender friendly laws Personal covenants in 8 of 10 provinces Origination landscape has been dominated by banks About only one-third of new originations from broker channel, remainder through bank branch and other sales networks Subprime market was at a much earlier stage of development The sub-prime market in Canada is estimated to be only about 5% of the total mortgage industry versus historically 20% in the U.S 7

8 Canadian Experience The result? Less aggressive products and policies (see Appendix A) No option ARMs with teaser rates, no interest-only products, no negative amortization - resulting in a better performing portfolio. Much higher profitability Less spread competition in Canada had preserved profitability relative in the U.S. This additional profitability acts as a source of liquidity. Defaults for both prime and sub-prime much lower U.S. Prime vs. Canada Prime: 3.74% vs. 0.31% (Q4 2008) U.S. Sub-prime vs. Xceed uninsured: 23.11% vs. 3.27% (Q4 2008) (see Appendix B for more details) Safer business environment Non-recourse securitization (Source: Mortgage Bankers Association, Canadian Bankers Association) 8

9 Xceed Experience Xceed s outstanding portfolio of securitized uninsured nonprime mortgages is diversified and appropriately structured Average LTV: 85% (at origination), 74% (current w price appreciation) Geographic distribution: Well diversified, matches population distribution Owner occupied vs. rental: 90% vs. 10% Single family dwelling vs. condo: 97% vs. 3% Fixed vs. variable: 94% vs. 6% Xceed has a retained interest in the return & performance of the underlying assets of the securitized portfolio 9

10 Appendix A: Product Credit Risk Comparison early 2008 No Income/No Asset Option ARMs Interest Only Second Mortgages Maximum LTV Stated Income (ii) / Low Documentation Typical Amortization Auto-adjudication Appraisals Skip Payments Teaser Rates Xceed (Uninsured Non-Prime) 100% (i) < 10% 25 years to 35 years Full US Sub-Prime Market 125% > 40% 30 years to 50 years Practice Varies (i) Does not include Xceed s application fee of 4% on 100% LTV product 10 (ii) Unlike others, Xceed verifies job tenure, assess plausibility of income

11 Appendix B: Defaults Comparison Prime Market Mortgage Market - Prime Percent (%) 0.00 Q Q Q Q Q Q Q Q Q Q Q US Prime Mkt Cdn Prime Mkt Data includes mortgages with more than 3 missed payments and foreclosures 11 Source: Mortgage Bankers Association, Canadian Bankers Association

12 Appendix B: Defaults Comparison Sub-Prime Mortgage Market - Sub-Prime Percent (%) Q Q Q Q Q Q Q Q Q Q Q US SubPrime Mkt Xceed Data includes mortgages with more than 3 missed payments and foreclosures 12 Xceed s defaults are on its portfolio of securitized uninsured non-prime mortgages Source: Mortgage Bankers Association, Xceed