DBRS Confirms Ratings of Xceed Mortgage Trust, Series 2007-T2

DBRS has today confirmed the ratings of the outstanding rated Series 2007-T2 notes issued by Xceed Mortgage Trust (the Trust) as listed below. The confirmation of the ratings is part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

– Class A-2 notes at AAA (sf)
– Class A-3 notes at AAA (sf)
– Class B notes at AA (sf)
– Class C notes at “A” (sf)
– Class D notes at BBB (sf)

The ratings are based on the following factors:

(1) The level of structural enhancement in subordination for each class has increased significantly from 16.0% (Class A-2 and Class A-3), 12.5% (Class B), 8.0% (Class C) and 3.5% (Class D) at closing to 89.1%, 68.0%, 40.8% and 13.7%, respectively, as of December 31, 2010, according to the monthly servicer reports provided. The current levels would be slightly lower, at 78.3%, 59.8%, 35.9% and 12.1%, respectively, if all the Series 2007-T2 notes (including the unrated Class E notes after the implied writedown discussed below) were included in the calculation. In either case, the subordination levels will continue to increase as the notes are paid down. In addition, as a result of the transaction entering into amortization in March 2009, excess spread, if any, is trapped in the structure instead of being released to Xceed Mortgage Corporation (Xceed), the seller. The notes are being repaid sequentially, and lower-rated notes will not receive any principal repayment until the higher-rated notes have been fully repaid.

(2) The underlying collateral has amortized down to approximately 17% of the closing mortgage pool and has not shown any noticeable deterioration in the key credit characteristics of the pool such as the mortgage yield, credit score, property ownership and property type, based on the latest loan-level details as of December 31, 2010. The weighted-average loan-to-value (LTV) decreased, as expected, from 87.3% at closing to 82.7% currently. Overall, the credit quality of the collateral pool has improved moderately, except for the balloon risk discussed below. Furthermore, the final distribution date of the notes is February 18, 2013, 12 months after the last scheduled mortgage maturity. This increases the likelihood that the notes will be fully repaid.

(3) As of December 31, 2010, the cumulative losses were $11.73 million (or 2.17% of the closing collateral). The ensuing losses, if any, over the remaining life of the transaction (estimated by DBRS to be less than 12 months) are not expected to be in an amount detrimental to the ratings of the notes. Should a loss on the notes occur, it would happen in a reverse-sequential order and begin with the unrated Class E notes, which are primarily supported by the cash collateral account. The BBB-rated Class D notes would not be fully repaid if the losses over the remaining life of the transaction are greater than the current amounts in the cash collateral account ($12.25 million), provision account ($0.47 million) and excess spread available. DBRS considers the likelihood of the current collateral pool incurring additional losses in excess of $12 million as low.

Despite the above strengths, the notes could face the following challenges:

(1) The mortgage borrowers are obligated to repay the outstanding loan balance at the end of the mortgage term (balloon payment) or the mortgage would be in arrears or in default. There is a risk (balloon risk) that borrowers will not be able to renew or obtain a new mortgage to repay the balloon payment according to the terms of the mortgages. Balloon risk for this pool, which is composed of mortgages of three- and five-year terms, is considered significant as funding availability for uninsured, non-prime and high LTV mortgages is currently limited. However, DBRS’s assessment of the required credit enhancement at the issuance of the notes took into consideration such refinancing risk of the balloon payment. Based on the experience of this pool, the three-year mortgages with scheduled maturities in late 2009 and early 2010 were largely repaid and incurred much lower losses than the DBRS assumption. DBRS expects that losses on the maturing five-year mortgages in late 2011 and early 2012 would be similar or slightly less as LTV at maturity will be slightly lower. The risk is further mitigated by the increasing subordination for the notes over time.

(2) The cash account balance, funded by the issuance of the Class E notes at closing, remained stable at $18.85 million from closing until March 2009 and has since declined to $12.25 million as of December 31, 2010. The Class E notes are, therefore, considered undercollateralized, with an implied writedown of $6.6 million so far. Since March 2009, the Trust has been underhedged by the amount of the Class A-2 and Class A-3 notes outstanding in excess of the swaps purchased at closing, whose notional assumes the Class A-2 and Class A-3 notes would be fully repaid on their respective targeted payment dates. As a result of the hedge mismatch, the Trust incurred interest payments on the underhedged portion of the notes outstanding (up to $200 million). Interest collections, along with excess spread, have been insufficient to meet the elevated expenses of the Trust; therefore, the cash account has been drawn for the use of increased hedge payments, interest on the notes and provisions for credit losses. As the mortgages are paid down over time, the underhedged balance of the notes continues to decrease and the draws from the cash account have also decreased to a nominal amount for the month of December 2010. DBRS expects the cash draw going forward to be minimal as the spread between mortgage yields and the swaps should be sufficient to cover the interest payments on the underhedged notes. In addition, losses on defaulted mortgages are reduced by the amount available in the provision account.

Xceed has been providing alternative mortgage financing for non-traditional market segments in Canada since 1997. As of October 31, 2010, it had $1.6 billion mortgages under administration. The servicing of the mortgage loans in the Trust has been delegated to MCAP Service Corporation (MCAP), one of the largest mortgage-servicing companies in Canada. There is no commingling of mortgage payments with the funds of the Trust as all periodic payments are automatically debited from the accounts of the borrowers and deposited into the Trust accounts maintained by MCAP; however, Xceed retains ultimate responsibility for the servicing.

DBRS monitors the performance of the transaction to identify any deviation from DBRS’s expectation at issuance and to ensure that the ratings remain appropriate. The review is predicated on the timely receipt of performance information from the related providers. The performance and characteristics of the custodial pool and the notes are available and updated each month in the Monthly Canadian ABS Report (see Related Research below).

For more detailed information on the transaction structure, please refer to the rating reports of the Trust at www.dbrs.com.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Canadian RMBS Methodology, Swap Criteria for Canadian Structured Finance Transactions and Legal Criteria for Canadian Structured Finance, which are available on our website under Methodologies.