You're poorer than you think
Logo courtesy of RateHub
When we purchased a house in Kelowna a few years ago, I was amazed at the lightning speed with which banks would extend my line of credit.
True, the provincially assessed value of the house did triple inside of six years, but it was still shocking to see the credit offers pour through from our lender, not to mention these mysterious mailings to offer even more rope to hang ourselves with.
Now, thanks to a Globe and Mail investigation, turns out the very mechanism for churning out those Home Equity Lines of Credit (HELOC) might be fatefully flawed. The culprit is a computer program known as Emili, an “automated system that uses figures such as recent sales of nearby homes to gauge values, without sending an actual appraiser to the address...The potential margin of error in calculations may pose significant problems…could allow them to overpay or borrow much too heavily on the home.”
Emili is used primarily by the Canada Mortgage and Housing Corporation, the largest mortgage insurer in the country. Though mortgage defaults are still rare in Canada, reckless borrowing on HELOCs prompted by rapidly rising real estate values in the United States is partially to blame for the financial crisis of 2008.
Most people utilize HELOC—which are usually a point or two above their negotiated mortgage rate—to do home renovations which may increase the value of the house. A real problem occurs when mortgage debt is used to finance credit cards at a lower rate, or, worse, if the debt is used to leverage investments in, say, the stock market or by putting deposits down on condos that have not been built yet. Known as ‘high illiquidity’, these loans can be extremely difficult to payoff quickly and can have a devastatingly cascading effect on the housing economy, as meltdowns in Nevada, Ireland, and Spain have proven.
Related Content on the Vancouver Observer
(3) Comments
With all due respect, this post is quite flawed and inaccurate (as the globe's article was as well, buncommercial few comments from unnamed individuals with unknown intentions).
This is the most objecive and factual piece I have seen so far on this: http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/10/cmhcs-emili-under-fire.html
Also...insurers can't insure HELOCs
... is irrelevant if you consider that the CMHC is - by its nature - incented to insure and/or buy more debt than a private insurer would consider taking on. The executives at CMHC are rewarded for steadily increasing the size of CMHC's books, not for avoiding risk at all costs.
The next year will prove challenging for CMHC, as the rate of delinquencies increases due to tighter lending rules and falling home prices. My guess is in two years' time - just in time for the federal election cycle - the CEO of CMHC will be walking the plank for soaking the feds with a few billion in unexpected sovereign debt.
The price one pays for a house is arrived at by negotiations between the buyer and seller, facilitated by the realtors. All that CMHC is doing is indicating if the anticipated mortgage value is within the range of typical sales in a neighbourhood. The sole purpose of the data is to protect cash advance lenders from putting more money into a property than they might recover in a forced sale. In all lending situations the banks are mainly interested in the borrower's ability to make the monthly payments...they really don't care if he or she paid too much for or got a great deal on a home. If they can make the payments, the bank is ususally good to go.