New Year’s Underwriting Resolutions

So the New Year is quickly approaching. You may have already scribbled down your personal resolutions for 2015 – but have you written down your professional ones?

Underwriters unite! What New Year’s underwriting do you have to share with your fellow financial professionals?

HPI Monthly Report: Home Prices Down 0.3% in November

In November, the Teranet–National Bank National Composite House Price Index™ was down 0.3% from the previous month. It was the first monthly decline in a year. Moreover, it was very broad-based: prices were down in eight of the 11 metropolitan markets surveyed, flat in two and up in only one. Prices fell 1.6% in Halifax, 1.5% in Quebec City, 1.0% in Montreal, 0.7% in Winnipeg, 0.6 % in Ottawa-Gatineau, 0.3% in Toronto and Victoria and 0.2% in Calgary. Prices were flat from the month before in Vancouver and Hamilton and rose 1.1% in Edmonton. It was the first time in two years that prices were up on the month in only one of the markets surveyed.

Since in November 2013 the composite index declined only 0.1%, this November’s 0.3% decline meant that 12‑month home price inflation decelerated from 5.4% in October to 5.2% in November. That countrywide average was largely exceeded in Calgary (9.2%), Toronto (7.3%), Hamilton (7.0%), Edmonton (6.2%) and Vancouver (5.9%). Unsurprisingly, the resale market in these five urban areas is balanced or even tight. The 12-month increase was more moderate in Winnipeg (1.5%), Victoria (1.4%) and Montreal (0.6%). Prices were down from a year earlier in Ottawa-Gatineau (−0.2%), in Quebec City (-0.3%) and Halifax (−1.8%). The composite index has been up from a year earlier for 62 months now, since October 2009. The only one of the 11 markets to match that run is Toronto, though Hamilton comes close with 60 months.

For the full report including historical data, please visit: www.housepriceindex.ca

Underwriting 2.0 - Using an AVM to Validate Your Appraisals

Many mortgages involve appraisals. When you are considering funding a deal that relies heavily on home equity the appraisal is the one thing that validates that your security is worth what was stated in the mortgage application.

Appraisals can be somewhat subjective because, while there are 2 distinct methodologies (comparable sale method and income method) an appraiser can be swayed by their opinion of property condition. They have the discretion to select which comparable sales are used and sometimes even discretion over what distance and sale time is acceptable in terms of what is used. For example, if you don’t specify distance to the appraiser, your appraisal could include comps outside of the client’s subdivision and variances in value can be vast from one subdivision to another; from one side of a subdivision to another, the quality, types and designs of homes can change, which can impact value.

Many lenders are now adopting AVMs (Automated Valuation Model) into their underwriting process just to double check/validate the value that comes back on an appraisal. Where equity is not as high a concern, many lenders will also couple a drive-by appraisal with their AVM. An AVM, as you may know, is an automated tool that you can use to estimate the value of a property. Different AVM providers obtain their data from different sources and also use different methods in terms of how the value was calculated.

What is true of all AVMs is that they are emotionless. They estimate value based on data and data alone. For this reason often an appraisal coupled with an AVM is your most powerful combination to ensure the value you are lending is certainly within the ballpark of what was initially estimated.

Another way that an AVM can be used with an appraisal to actually reduce the overall cost of appraisal is that you can even look at an AVM before you request the appraisal. This way you can get a ballpark on the value, upsell your deal where there is more value, or go back to the broker or the branch if the value is not there and before you or your client incur the expense of a drive-by or even full blown appraisal.

Once the appraisal is performed you will have the full picture because you will have an automated valuation of the property to compare against the appraisal, thereby giving you more insight into interior/exterior conditioning, home improvements and other things that you would otherwise need to visit the property to learn.

For more about the benefits of coupling an AVM with an appraisal, or to find out more about Automated Valuation Models, please contact Purview For Lenders today by calling 1.855.787.8439.

The True Cost of Mortgage Fraud and How to Mitigate It!

While perpetrators of mortgage fraud may think it is no big deal because it is somehow a victimless crime, mortgage fraud costs the mortgage industry as a whole. The cost of mortgage fraud is more than just the cost of the lost mortgage that may have been advanced – operational costs associated to collections, default management, power of sale/foreclosure costs, legal fees, property repair and maintenance costs, resale costs and more are all resulting costs associated with this crime.

The cost of mortgage fraud to brokers and the public include: more stringent lending guidelines and verifications by lenders, and rightfully so.

While as a lender you may rely on the mortgage broker or real estate lawyer to catch fraud, you have no way to know what tools they use or what internal procedures they have in place when performing due diligence. In fact, there have been many proven cases of mortgage brokers or real estate lawyers who were the perpetrators of the fraud.

In the former mortgage underwriting course offered at Seneca, the textbook used highlighted a famous example of mortgage fraud in Canada that involved (surprisingly) a real estate lawyer. In 2006, the Law Society of BC approved over 30 million dollars in payments in connection with a multi-million dollar real estate fraud case where a real estate lawyer received funds to discharge titles on real estate transactions he was involved in with a developer. The lawyer was subsequently disbarred.

Most financial and legal professionals are ethical but we can see how a few bad apples can spoil the whole bunch. So what can you do to protect yourself and reduce the cost of mortgage fraud within your organization?

The 2 most common forms of mortgage fraud are:

·       Fraud by shelter - this is when an application is manipulated so that a potential homeowner who could otherwise not afford a mortgage is approved – this could be through misstating income, doctoring documents all the way up to identify fraud.

·       Title fraud - this is when fraud is undertaken by an individual or group to make a profit and often the identity of the homeowner is assumed and a new mortgage is taken out.

The most common ways that individuals and other professionals in the industry commit mortgage fraud as it relates to a property are:

·       Over-inflating the value of the property

·       Misrepresenting characteristics of a property

·       Misrepresenting the use of property – the intention is for the property to be used for rental

·       Builder bail-out schemes – a builder presents paid borrowers as new homeowners to secure financing

·       Fraudulent title transfers

·       Property not in the name of the seller

Many lenders use tools like Fraud Check, an aspect of the Purview Report, to review active mortgages, recent sales, prior foreclosures, no conc. management, active judgement, active caution, active liens, power of sale, unusual discharges, frequency of Powers of Sale in an area and more…This information can really help to avoid the costs associated with mortgage fraud because it helps to mitigate risk.

Leveraging tools such as Purview For Lenders enable you to investigate a property or borrower, identifying potential fraud quickly so that you can dig that much deeper to ensure that you have a solid deal. These tools also go a long way towards mitigating fraud (especially where it relates to a property) and reducing the overall cost of mortgage fraud in the mortgage industry.

Mortgage fraud costs everyone involved a great deal of time, money and effort, can lead to the disintegration of important relationships, can damage reputations and make future success difficult.

For more about how Purview For Lenders can help you mitigate risks and identify fraud before it becomes a major wrecking ball, please contact us today by calling 1.855.787.8439.

Happy Holidays from Purview For Lenders

December is here and it is time for the holidays! The entire Purview team at Teranet extends you and your family warm wishes over the holiday season and all the best successes in the New Year.