New Mortgage Lending Guidelines Raise Concerns
OSFI asked for comments on the new guidelines from banks, real-estate appraisers, mortgage insurers and mortgage brokers earlier this year. Based on the comments received, OSFI backed off on two ideas that were initially proposed — a requirement for home equity lines of credit to be amortized and a requirement that people requalify when they renew their mortgage.
But other concerns were not addressed, including that a national database that estimates the value of houses may be inaccurate. The database, an automated system dubbed Emili, is used by the nation’s biggest mortgage insurer, Canada Mortgage and Housing Corp., to set values, without having an appraiser sent to the address.
“The Emili system does not estimate a property’s market value; instead it uses general parameters to determine a risk potential,” one commenter wrote in the OSFI documents. “That explains why CMHC-insured loans are often granted without truly taking into account the property’s market value — and therefore — the Loan to Value ratio. This poses a real danger of altering housing market data.”
Rick Sieb, real estate appraiser in Vancouver, said the system could mean some home buyers pay too much.
“From our standpoint, the people who really are not served well by this system are the first-time homebuyers,” Sieb said. “Before this system came in, we would do an appraisal for a purchase. The bank would only loan (based on) the value of the appraisal. A lot of times what used to happen is that the buyer would go back and renegotiate their deal. That doesn’t happen now because they don’t have that extra step in there.”
Sieb said that in the late ’80s, before Emili was introduced in 1996, one or two deals a week would either fall through or be renegotiated because an appraisal came in lower than expected.
“When it’s a conventional mortgage, the bank sends out appraisers because it’s their money,” Sieb said, adding that sometimes they will do a full walk-through appraisal, while other times they will drive by to guarantee a certain minimum value, and other times they will look at the property tax assessment.
“It depends how much they are trying to purchase,” Sieb said.
Marion Wrobell, vice-president of policy and operations for the Canadian Bankers Association, said banks make decisions on when to order a full appraisal based on different factors.
“They will choose whatever is appropriate to the circumstances,” Wrobell said. “We do the same underwriting for an insured mortgage as we do for other mortgages.”
Wrobell said CMHC has an incentive to make sure their valuations are accurate, because in the end they are taking the risk of insuring the mortgages.
“I don’t think it’s fair to suggest that there are these huge flaws with Emili.” Wrobell said.
He said there is a margin of error in any valuation, including those made by personal appraisers.
“As long as there is no systematic bias to over-value (properties), from a bank’s point of view, it should even out,” Wrobell said.
CMHC’s chief risk officer Pierre Serré said in a statement that Emili does look at the specific characteristics of each property using different information sources.
“This includes the physical characteristics of the property, the municipal property tax assessment, historical and current sales activity, and prior sales activity of the property being assessed, when available,” Serré said. “CMHC does not use property value averages, but uses the specific characteristics of the property being assessed. The database and models are continually updated and independently reviewed by a third party.”
OSFI did not change their rules for property appraisal, but their new guideline does say that banks should not rely on any single method for property valuations.
Another concern expressed in the documents is that reducing the maximum home equity line of credit to 65 per cent of a property’s value could have “significant economic implications” and that “any interventions to this marketplace will likely result in higher borrowing costs to consumers, lower affordability and a greater risk of default.”
OSFI did state that the guideline will not apply retroactively to in-force residential mortgages, but will limit HELOCs to 65 per cent of a property’s value.
Home prices have soared in Canada, raising concerns of a market crash, and making the housing market a key risk to the country’s financial outlook.
In June, Finance Minister Jim Flaherty announced stricter rules on lending for high-ratio mortgages in a bid to cool the housing market. The new rules limit the maximum amortization period on such mortgages to 25 years, down from 30 years, and cap the amount that can be refinanced at 80 per cent, down from 85 per cent.
Banks must comply with the new guidelines by the end of the 2012-2013 fiscal year, which varies by institution, but will be at the end of October for the country’s big banks. Credit unions are overseen by provincial regulators, not by federal regulators, although changes are expected that would allow credit unions to become federally regulated.
In Metro Vancouver, over the past few months the real estate market has cooled with home resale prices dropping slightly and sales activity significantly below historical levels.