Analysis: Canada house appraisal tool seen skewing values

Wed Oct 17, 2012 4:21pm EDT
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By Cameron French

TORONTO (Reuters) - A Canadian database that allows mortgage lenders to appraise a property quickly before writing a loan may have overvalued homes in the country's sizzling housing markets and could raise the risk of a devastating U.S.-style crash.

Some experts worry it puts lenders and mortgage insurers in a vulnerable position should the hot housing markets of Toronto, Vancouver and other big cities experience a hard landing.

Fears that the housing market may be at a tipping point are intensifying. On Monday, data showed Canadian home sales fell by 15.1 percent in September compared with a year earlier, while Canadians' indebtedness hit 163.4 percent of their income, much higher than previously thought.

Documents obtained through an Access to Information request suggest some industry players are worried about the database, called Emili and operated by Canada Mortgage and Housing Corporation, a government-owned mortgage insurer.

Lenders use the system to gauge if a house is worth the price the buyer paid, and if not, they may decide to withhold the full value of the mortgage.

Emili uses a combination of sales figures from nearby homes, property assessment data and information about the property taken from its online house listing. It saves the lenders time and money because they do not need to send experts to appraise the value of an individual property.

That said, the system "has significant shortcomings," says one respondent quoted in the documents from the Office of the Superintendent of Financial Institutions (OSFI), Canada's federal banking regulator. The documents were compiled as part of a consultation process on mortgage underwriting practices.

By relying on data from surrounding properties, the system is prone to looking past specifics that could change the value of an individual property, critics say.   Continued...