Although the industry group requires its people to complete a battery of courses, it is “increasingly concerned about the number of individuals who hold themselves out as ‘appraisers’ – and offer very attractive rates – who have no relevant qualifications or expertise and who are accountable to no one,” Mr. McLean said.
“I’ve probably been asked 100 times, ‘I really need this number and I’ll pay you extra,’ ” Mr. McLean said. “Fortunately, I’m busy enough [to say no]. But if you need the business, desperate people do desperate things.”
At a time when the U.S. has introduced new regulation to reform appraisal practices that are believed to have contributed to its housing crisis, Canada has yet to act. The concerns about automated appraisals, contained in the documents obtained by The Globe, are only starting to come to the surface.
Relying on any one system too heavily – whether human or computer – is what ultimately creates problems, observers say.
“We’ve got to change the way the appraisal industry goes about doing their job,” Mr. West said. “I see this perfect storm on the horizon. You can’t turn the industry on a dime.”
Gaming the system
In the rush to faster and cheaper approvals over the past decade, on-site appraisals have fallen out of favour for mortgage refinancings. And this trend has created an entirely new set of concerns over accuracy.
The imprecision of automated systems becomes even more problematic when it comes to home refinancings, where homeowners can add hundreds of thousands of dollars to their mortgage.
Where the sale of a house is subject to the market – the buyer and seller must agree on a price – no such check exists for refinancings. The house may not have been on the market for years, and a computer crunching average prices for the area could end up being significantly wrong about a particular property.
Refinancings have grown rapidly in the housing boom, and now measure in the tens of billions of dollars annually. Though reliable historic data isn’t available, Canadians borrowed more than $30-billion through refinancings in the last year alone, according to the Canadian Association of Accredited Mortgage Professionals.
When the Bank of Canada flagged consumer debt as the “biggest domestic risk” to the economy this year, it said the habit of consumers taking equity out of their home was at the heart of the problem, and noted that such growth appears to have occurred “in a context of underwriting standards that are less than optimal.”
In tandem with low interest rates, lax appraisal standards fuelled this stunning rise in borrowing. In the case of mortgage refinancings, it was simply a matter of the banks “pinging” Emili to see if a house could support a bigger loan – say an extra $50,000, or maybe $500,000.
Royal Bank of Canada, the country’s biggest lender, acknowledges this risk. “CMHC would disagree with this, but for our books I don’t want to do a refinancing where someone comes in and says, ‘My house is worth $700,000, it’s up from $400,000 three years ago, I’d like a refinancing and I’d like to borrow $500,000 against that please,’ ” Mr. McKay said.
“There is no transaction to look to. The customer thinks their house has gone up in value, so how do you verify that? You have a range of values that Emili works within. You haven’t sent anyone over to the house, and Emili is looking at the street number and the context of the price within [the neighbourhood], but you don’t know if it’s the most run-down house in the neighbourhood or the most valuable.”
Since the automated system only determines if a loan is risky or not, an overzealous consumer, or an aggressive loans officer who wants to encourage a customer to borrow as much as possible, can use the system to discover the maximum threshold for a loan to be considered acceptable. This can inflate both consumer borrowing and house prices.