Now that the Canadian housing bubble appears to be running out of steam we’re starting to hear concerns that automated appraisals have helped push prices up higher than they ought to be.
This article in the globe and mail was linked in fridays free-for-all post, but is worth a closer look.
Automated appraisals save time and money but have such a big margin of error that they are practically worthless.
Now people involved in lending are starting to worry about the fall out of relying too much on an automated system:
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, the documents suggest.
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.
Ooops! But as a comforting side effect, it appears that appraisals that came in too high in a hot market did enable the CMHC to collect higher fees. Read the full article here.