As if our housing prices weren’t increasing enough on their own. Now a disturbing article from The Globe and Mail suggests that Canada’s housing prices may be being skewed by a flawed automated system. And if that’s true, everyone’s got something to lose – homebuyers, homeowners, and lenders.
The problem all goes back to an automated system used by lenders to determine a certain home’s value. The automated value model (AVM) is called Emili. When lenders, and insurers such as CMHC, need to get the amount of a property’s value, they’ll submit a request to Emili and Emili will shoot back a reply saying that the value falls within an estimated figure, or that it doesn’t. This is a system that has been in use for some time, but it’s probably not the idea one has when it comes to determining the value of any property.
Usually, that would require an appraiser. This appraiser, a real human being, would visit the property and thoroughly inspect it, and then determine a real value based on what they saw. But humans are humans. They only have so much time to go around; and that time can be expensive. Especially when you have property after property they need to inspect. Emili on the other hand, is fast and much cheaper. Seems like a much better alternative for everyone included.
But, there’s a problem. That problem lies in the way the data is figured and delivered back to the lender, broker or insurer. That figure, instead of being based on an actual figure due to actual evidence, is instead based on things such as home sales in the surrounding area. It’s true that an appraiser may also take these factors into consideration when making their appraisal, but they’d also use other factors, such as the actual condition and size of the home.
If this sounds dangerous to you, that’s because it is. And documents obtained by The Globe show just what exactly that danger is.
One of the most obvious is the risk to consumers – homebuyers and homeowners. Without a proper appraisal that truly reflects the value of the property, a homeowner could be allowed to borrow too much against a home with a HELOC or home equity loan. If that value were ever to be corrected, the homeowner could potentially even find themselves underwater – owing more on their home than the property is actually worth.
“It allows people to pay too much for a property,” says Rick Sieb, president of Intercity Appraisals Ltd. in Vancouver. “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.’ 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.”
But that’s not actually true. Lenders could very well be hurt if Emili were to be too far off, too far often. This is because these lenders are almost just as reliant on true home values as owners and buyers are. That value is directly related to how much collateral the lender holds. And if the property isn’t worth as much as Emili said it was, that amount in collateral automatically decreases simply because it was never there to begin with.
But the damage could go even far past just buyers and lenders. It could hurt the economy as a whole.
“Although it provides very rapid responses, this automated approval system has significant shortcomings,” says one anonymous industry insider within the report. “This poses a real danger of altering housing market data.”
And anytime we’re not working with real numbers and accurate data, we’re in trouble. Remember when the US housing collapse was blamed on bad loans and lenders simply handing out mortgages to anyone who asked for one? Proper procedures weren’t being followed. And while it’s not the exact same thing happening here, if what’s being said in these documents are true, it’s clear that proper procedures are not being followed here either.
And that’s trouble.
But The Globe wasn’t the first to hear about the practice of obtaining home values through Emili; nor was it the first to raise concern about it.
Back in the summer, when financial institutions were coming under heavy fire from the OSFI, the Superintendent also told them to look very closely at how they were obtaining property values; and to make sure that this data was accurate when it came in. But while the OSFI may have made their recommendations and issued new guidelines, unfortunately no mention of Emili was made.
Perhaps that’s because there’s no real concern. That’s certainly what a spokesperson over at CMHC seems to believe. When speaking to The Globe on Wednesday, a spokesperson said that Emili was used “when appropriate” and that the system “relies on a number of different factors and models beyond home resale data.”
What do you think? Is using Emili an acceptable way to gather housing data? Or is it risky behaviour that needs to be seriously looked into, and perhaps stopped altogether?