“Flaws in a national databank that helps determine the value of houses across Canada have helped fuel inflation in home prices, putting mortgage lenders and borrowers at greater risk, key players in the housing sector have warned.
Documents obtained by The Globe and Mail detailing confidential statements from banks, appraisers and mortgage insurers show rising worry over the use of a database operated by the Canada Mortgage and Housing Corporation (CMHC). The documents suggest the data are flawed and help push home prices up. …
Introduced in 1996 as a way for the CMHC, banks and other lenders to quickly and inexpensively determine how much money can be lent against a residential property, the database known as Emili is relied upon too heavily by lenders, the documents suggest.For home buyers, or homeowners with home-equity lines of credit, an inaccurate valuation by the database could allow them to overpay or borrow much too heavily for the home, industry members argue.” …
“It allows people to pay too much for a property,” Rick Sieb, president of Intercity Appraisals Ltd. in Vancouver, said in an interview. “If the property is worth $300, and somebody comes through and the realtor has convinced him to pay $330, so he’s 10 per cent out, and they submit it through Emili or another AVM, it will just say ‘yeah, that’s fine for that area,” Mr. Sieb said. “So the lender still lends the money, the guy still buys it, and the only person hurt in the whole deal is the person who paid too much.”
The Canadian housing market has been on a tear for much of the past decade but is now showing signs of petering out.” …
“During a hot housing market, a wider margin of error on estimated values was less of a concern, since there is smaller likelihood a mortgage or loan refinancing will end up under water. But if the market starts to fall, as some economists expect, the accuracy of appraisals becomes paramount. When a lender is forced to liquidate a home in the event of a default, it could incur a loss. In the case of CMHC, the federal government would be left picking up the tab.”
- from ‘Potentially flawed data used by banks and lenders bump up house prices’, G&M, 10 Oct 2012
One relatively minor facet of the ‘people-overextended-themselves’ story.
As predicted, when a market turns, the strain starts showing all over the place.
‘Virtuous’ cycle turns vicious.