“It allows people to pay too much for a property. 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.”

“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

Yup.
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.
– vreaa

20 responses to ““It allows people to pay too much for a property. 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.”

  1. I’m disgusted… it took so long for regulators to call out a practice known stateside to have potential fatal flaws.

    The problem goes deeper than EMILI, but read the article’s last few paragraphs; it appears the hate for EMILI is universal but for diametrically opposite reasons!

  2. Something not mentioned in the article is that these data problems are most likely to be exploited by mortgage fraudsters, who deliberately pick the smallest, most run down place in the neighbourhood, flip it between a few straw buyers and abscond with the cash from the mortgage on the last transaction, which turns out to be far more than the place is obviously worth. This is generally obvious even from a drive-by inspection, but not to dear old EMILI who, like justice, is blind.

    • The amount of mortgage fraud covered up by the 2009 bounce is likely obscene. In Alberta the bounce higher didn’t happen and they are still unearthing frauds.

  3. Renters Revenge

    The buyer isn’t the only person hurt. This stuff hurts everyone negatively affected by distorted RE prices – other buyers, renters, and mostly taxpayers (through CMHC bailout).

  4. 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.

    Huh? Is someone holding a gun to the buyer’s head?
    A property does not have an intrinsic value. It’s all subjective. If someone buys at the top of a bubble for XX% above the appraised value, despite the negative cash flow and fundamentals and all the information that is available, then he has nobody to blame but himself.

    The real people who are hurt by this are the taxpayers who will be footing the final bill, especially those who did not buy, but still have to pay for the cleanup.

    • Agree with this post, anyone participating in a pyramid has chosen to do so at his own will. Also if these insane ridiculous deals were not backed up by the CHMC, these data problems would not be exploited by mortgage people but promptly reported and dealt with – if their own money were on the line, not CHMC and therefore the taxpayers.

    • Indeed, “The only person hurt” might want to include people who loaned their money to, or are otherwise underwriting, “the guy”.

    • A habitable property near a functioning economy with jobs DOES have an intrinsic value, being the net present value of its net rents, or, to put it another way, the price at which a rational long term investor would be indifferent to keeping it or selling it.

      Nobody was holding a gun to the buyer’s head, but somebody WAS lending him money secured by the property. A prudent lender tries to ascertain whether, if the borrower should default, another buyer could likely be found to pay more than the amount lent plus recovery costs. Colloquially, an appraisal seeks to quantify what the second biggest fool would pay.

      • “Nobody was holding a gun to the buyer’s head”

        Nobody was holding a gun to the lender’s head either. So it sounds like it’s all supery-wiffic.

        As you stated, Ralph, it really is all about intrinsic value. It’s so obvious it makes my ears bleed. No guns required.

      • Ralph said – A prudent lender tries to ascertain whether, if the borrower should default, another buyer could likely be found to pay more than the amount lent plus recovery costs – why the lender would even bother about selling that property if the mortgage is backed up by the CHMC? It changes everything and the prudence is no longer required.

      • Ralph, are you Farmer? All your posts lately are fascinating, and Farmer has stopped posting.

      • Ralph Cramdown

        “CMHC changes everything…”

        You’ll have to read the fine print, but I always watch what’s happening in the US and assume we’re a few years behind. There, the survivors and successors of the big mortgage originators are locked in epic struggles worth b-b-b-b-b-billions versus Fannie and Freddie. The question is: Was due dilligence exercised when loan x was underwritten, or should the lender have known it was fraudulent (bad appraisal, bad income, etc.). If a prudent lender should have spotted the problem, the GSEs want to ‘put back’ the crap loan onto the originator. Fur is flying. Future Canadian defence: “But Emili said ‘yes’!”

        No, I am not Farmer.

  5. Wouldn’t overpayment then create a feedback into EMILI that would lead to an even higher price range for the neighbourhood? and so on….

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