This blog wrote several posts detailing this process and if I can track down the exact posts I will link to them.
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).
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.
Emili is an automated system that uses figures such as recent sales of nearby homes to gauge values, without sending an actual appraiser to the address.
However, the potential margin of error in calculations may pose significant problems.
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.
For banks, it could mean the collateral they have against the mortgage is not worth as much as believed.
“Although it provides very rapid responses, this automated approval system has significant shortcomings,” says one industry respondent in the documents, which were obtained by The Globe and Mail through access to information requests. Because the database does not evaluate a specific property, but uses generalities to determine the risk level of a mortgage, “CMHC insured loans are often granted without truly taking into account the property’s market value,” the respondent says. “This poses a real danger of altering housing market data.”
Some borrowers got around downpayment requirements by using seller-funded downpayment assistance programs (DPA), in which a seller gives money to a charitable organizations that then give the money to them. From 2000 through 2006, more than 650,000 buyers got their down payments through nonprofits.
A stated income loan is a mortgage where the lender does not verify the borrower's income by looking at their pay stubs. These loans are nominally intended for self-employed borrowers, or other borrowers who might have difficulty documenting their income. Stated income loans have been extended to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans particularly simple targets for fraud.To address the problems arising from "liar loans", the Internal Revenue Service updated an income verification tool used by lenders to make confirmation of borrower's claimed income.
Even without an increase in interest rates, what will a declining market mean for mortgage holders here?
I can't help but wonder how bad it would have been in the United States if things there were like Canada.
Consider this for a moment.
In the United States you can get 30 year mortgage at the same low rate. The only people who didn't have 30 year mortgages were those who were 'riskier' borrowers.
Those 'riskier' borrowers had to arrange 1-7 year mortgages with mortgage rates that 'reset' after those short term periods (1-7 years). They called these borrowers 'sub-prime' borrowers.
When property values fell, these people were severely hurt when it came time to renew their mortgages. The domino effect these people had on the housing market was severe.
How many people do you know in Canada with mortgages that last longer than 5 years before their interest rate 'resets'?
Our entire nation is made up of mortgage holders that are as vulnerable as the 'sub-primer's' in the United States were. What will be the impact here if the real estate market continues to 'soften'?
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