In interviews, CMHC officials stressed that Emili uses a wide variety of data. However, officials refused to provide a specific list of where it obtains the data that feeds into Emili.
CMHC characterizes the views expressed in the documents as debate among industry members. But Mr. West, a former CMHC official, told The Globe the concerns about the accuracy of automated systems are warranted. Because the software can’t see the home, it can’t spot basic problems.
“One of the things that the on-site inspection does is it actually proves that the home exists in the first place. And that may sound like a very funny thing, but believe me, it would not be the first time a loan was put on a vacant piece of property,” said Mr. West, who is now president of Centract Settlement, a division of real estate giant Brookfield Residential Property Services.
CMHC acknowledges that this weakness exists in the system. A spokeswoman told The Globe in an e-mail that staff are aware of “a handful of cases” in which Emili has approved a mortgage for a non-existent house.
The problem with humans
While on-site assessments would catch such obvious flaws, switching from automated systems to in-person appraisers doesn’t solve all problems. Just as computers have weaknesses, so do humans.
“It’s not like appraisers are flawless or perfect,” said Tsur Somerville, an associate business professor at the University of British Columbia who specializes in real estate
Shopping around for a friendly appraisal is not unheard of in the industry – it can happen when mortgage brokers worry about a tough appraisal scuttling a deal or diminishing the price. In other cases, pushing up the value of the home in the appraisal allows the borrower to get a bigger loan.
“When we are dealing with mortgage brokers, we hear it a lot: ‘Can I get more? Get me more,’ ” says Mr. Sieb, the B.C. appraiser. “We actually have a broker who will e-mail us and say, ‘I need $500,000 on this, what do you think?’ The appraiser might say, there’s no way in hell. Then the broker just hangs up and phones the next guy until he gets the answer he likes.”
Walking through the backyard of a home in the Vancouver suburbs, Mr. Sieb gives a glimpse of how an on-site appraisal can be manipulated. There are tricks of the trade that every appraiser knows.
The yard looks out over a wooded area that hides a road. How you describe that view, he says, can be worth $10,000. Evaluating the type of street the home is on – busy or quiet – and the neighbourhood’s amenities is also highly subjective.
Kitchens are where most of the problems occur. “A kitchen could be a $20,000 or a $50,000 kitchen and look almost identical in a photo,” Mr. Sieb says. “Age and condition, design and quality” – those are the things that afford a lot of slack in an appraisal. “Renovations are where a lot of the fraud occurs.”
Just as a computer model can mistakenly upgrade or downgrade a home depending on its neighbourhood, an appraiser can inflate the value of a house by being overly optimistic in picking “comparable” houses as market benchmarks. A common criticism of appraisers is that they can be influenced. Although appraisal management firms such as Centract have sprouted up as intermediaries between banks and appraisers, financial institutions often keep lists of approved appraisers. This system of picking favourites has been made illegal in the U.S., where appraisers are not allowed to be tied to the lender in any way.
It is an open secret in Canada that brokers who bring in a lot of business to one lender can push to have certain appraisers added to those lists, one mortgage broker told The Globe and Mail on condition of anonymity.
Peter McLean, an appraiser in Peterborough who is president of the Ontario division of the Appraisal Institute of Canada, says regulations should be stepped up.
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