Tools that Matter: The House Price Index and You

Not to be confused with the recent Home Price Index being promoted by MLS, the House Price Index is a co-sponsored initiative by Teranet and the National Bank. Also known in short as HPI – the actual full name for the index is The Teranet–National Bank House Price Index™.

HPI is an independent representation of the rate of change of Canadian single-family home prices. The measurements are based on the property sales records of public land registries, lending accuracy and trustworthiness to the index. The monthly public indices currently cover 11 major cities across Canada.

So how does the HPI generate its numbers? It’s all automated!

The Teranet – National Bank House Price Index™ is estimated by tracking the observed or registered home prices over time. Properties with at least two sales are required in the calculations. Such a “sales pair” measures the increase or decrease of the property value in the period between the sales in a linear fashion. The fundamental assumption of the constant level quality of each property makes possible the index calculation but imposes difficulties in selecting (or filtering) those properties that satisfy it.

For the Teranet – National Bank House Price Index™, all properties that have been sold at least twice are considered in the calculation of the index; this is known as the repeat sales methodology. Properties that are affected by endogenous factors are not considered in the estimation. These factors may include: a) non-arms-length sale, b) change of type of property, for example after renovations, c) data error, and d) high turnover frequency (biannual or higher).

In the repeat sales methodology, the averaging of price appreciation from different pairs of sales is done using a complex estimation process in which each pair is a separate observation.

Lenders can leverage the data from the House Price Index to make more informed decisions that enable better overall risk management and portfolio valuation.

If you are a lender you can use the Teranet – National Bank House Price Index™ to:

•         Gain unparalleled insight into the dynamics of a highly varied Canadian housing market.

o   Keep abreast of Canadian housing market dynamics with timely housing data.

•         Acquire more granular information on house types, neighbourhoods, and price tiers with neighbourhood sub‐indices across nearly 90% of the Canadian population.

o   Review market activity at the FSA level

o   Review market activity by type of dwelling.

o   Compare neighbourhoods and gain insight into the performance of each targeted area.

•         Track mortgage collateral value using the catalogue of indexes.

o   Identify an increase or decrease in the value of your collateral by metropolitan area helping you determine where you are most exposed to risk.

• ·        Quickly identify trends and assess changes in home prices over time.

• ·        Assess and adjust your risk exposure.

• ·        Adjust lending policies to meet the needs of targeted geographic regions.

The Teranet-National Bank House Price Index™ is an important tool to utilize to cover all the bases. Save time and resources and be more competitive.

For more about The Teranet-National Bank House Price Index™ please contact Teranet today by calling 1.855.787.8439.

Purview Training: How to Identify Fraud on a Mortgage Application

An automated valuation model (AVM) can be an incredible tool to identify fraud. As it relates to the Purview For Lenders tool, when a property report is generated it will include both an AVM and Fraud Checks among other property information. This enables you to quickly check for suspicious or fraudulent activity and flag applications for further investigation. 

This short training video outlines how to use the configurable Fraud Check models of the Purview For Lenders property report to help identify if any suspicious activity is present on your deal. 

After watching this video, if you have further questions about generating or reviewing your Purview For Lenders property report please visit www.purview.ca/lenders. Not a Purview For Lenders client? Find out more about this revolutionary product today by contacting 1.855.787.8439.

 

 

Industry Impact: Is the implementation of B21 impacting your business?

B twenty what?? While B21 is emerging, some were not even fully aware of the existence of B20. Why? Because these guidelines put in place by the Office of the Superintendent of Financial Institutions applies to mortgage insurers.

Before we can explain more about B21 we have to get you up to speed on the lingo so you can follow the changes and what they may or may not mean to you.

• OSFI = The Office of the Superintendent of Financial Institutions
• FRMI = Federally-Regulated Mortgage Insurer
• RMIUP = Residential Mortgage Insurance Underwriting Plan 

We all know that the purpose of mortgage default insurance and of B21 is to tighten up guidelines since much of the exposure that an insurer faces is as a result of its “mortgage insurance underwriting policies, practices and risk management” according to the OSFI. The B21 sets out the expectations for all FRMIs to follow as it relates to underwriting and related activities.

Lenders, mortgage brokers and agents - this should matter you! If you fund high ratio insured deals the B21 will likely somewhat change the way insurers underwrite your applications.

Insurers – this is your opportunity to prepare for new guidelines and pursue the technology and tools that will make it easier to meet the new guidelines with the least amount of new workflow.

Part II of the guideline sets out 6 fundamental principles for sound mortgage underwriting – here they are as posted on the PSFI website:

• Principle 1: Residential Mortgage Insurance Underwriting Plan - A FRMI that is engaged in residential mortgage insurance underwriting should have a comprehensive Residential Mortgage Insurance Underwriting Plan (RMIUP). The FRMI’s insurance underwriting practices and procedures should comply with its established RMIUP.
• Principle 2: Establishing Standards for the Initial Assessment and Qualification of Mortgage Lenders - A FRMI should establish sound standards for the purpose of initially assessing and qualifying mortgage lenders for mortgage insurance coverage.
• Principle 3: Mortgage Insurance Criteria and Insurance Coverage Requirements for Lenders - A FRMI should establish prudent underwriting criteria, which specify the characteristics and parameters of insurable mortgage loans for lenders. In addition, a FRMI should promote sound mortgage underwriting and loan management practices by mortgage lenders by establishing prudent requirements in its insurance policies (e.g., Master Policy Agreements) for the purpose of controlling risk.
• Principle 4: FRMI’s Periodic Assessments of Lenders’ Underwriting Practices - A FRMI should exercise reasonable due diligence regarding lenders’ underwriting practices, on a periodic basis, in order to assess consistency with the FRMI’s criteria for insuring mortgage loans and compliance with the requirements contained in the FRMI’s policy coverage documents. A FRMI should establish clear policies for identifying, escalating, and as needed, addressing weak or non-compliant lender practices.
• Principle 5: Assessment and Validation of Underwriting Systems, Models, and Underwriters’ Processes - A FRMI that is engaged in residential mortgage insurance underwriting should periodically assess and validate its insurance underwriting systems, models, and underwriters’ processes, to ensure sound insurance underwriting outcomes and consistency with the FRMI’s RMIUP.
• Principle 6: Effective Portfolio Risk Management and other Risk Mitigation - FRMIs should have effective portfolio risk management practices, including the use of stress testing and, as appropriate, the use of reinsurance. Given the objectives and risk appetite established in the RMIUP, a FRMI should consider the outcome of stress-testing and risk mitigation in appropriately setting or adjusting its mortgage insurance underwriting criteria.

Look forward to future blogs where we will delve into some of the specific guidelines and what they mean to different parties involved in a mortgage transaction and also what technologies and tools stand to make compliance easier.

For more reading on this topic you can visit:

• http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b21.aspx
• http://www.ratesupermarket.ca/blog/mortgage-rule-update-will-osfi-b21-impact/

Stay informed and up to date on the latest industry news – always! For more information please contact Purview For Lenders today by calling 1.855.787.8439.

Game Time!!! Canadian Mortgage Underwriting Word Search

Take a break and have a crack at our Canadian Mortgage Underwriting Word Search. Call Purview For Lenders today at 1.855.787.8439.

http://purviewforlenders.com/game-time-crossword-mortgage-definitions/

Attn: Private Lenders: You Can Access the Same Tools as the Banks and Greatly Mitigate your Risk

As a private lender you are just as susceptible to funding a bad deal or (in a severe example) falling victim to mortgage fraud as a big bank. The difference is that the larger lending institutions have access to a wide variety of tools and resources that you may not feel you have access to. Well here is the good news – technology has made it easier than ever to leverage some of the tools that your competitors do. 

When you receive a deal - while the credit worthiness, character and income of the borrower are often factors in the decision to loan money and how much are factors in the lending process – avoiding bad deals and identifying crucial information about a property and its owners at the stage of an application being submitted is hugely beneficial.

Let’s face it - how many applications do you receive, especially in the area of mortgage refinancing, where the deal implodes at some stage in the lending process, often because of one of the following?  

·        The value is overstated – the appraisal does not come in on value

·        Mortgages registered are far greater than initially disclosed

·        Other mortgages are registered that have not been disclosed

·        Liens are registered on the property (FYI - Purview does not automatically show Liens – only registered mortgages on title – Lenders would have to pull and pay for an instrument image to get to these details)

·        Other people are on title that are not indicated in the mortgage application 

When this happens all sides to the transaction lose considerable time and expense. This can easily be mitigated using common reports that larger financial institutions have been using for more than a decade. While real estate sales professionals turn to GeoWarehouse to perform property reports and mortgage brokers turn to Purview For Mortgage Brokers property reports, lenders turn to the Purview For Lenders property report. 

This enables you to access information that identifies all of the above and more – including an automated fraud check. In the event that other people turn up on title, the value is way off or there are mortgages that create wide discrepancies in equity, you can go back and ask your borrower or mortgage broker to explain them, before expending time and energy underwriting the deal.

On the flipside, where more equity is revealed than initially anticipated and everything else checks out, you can proceed to order a full appraisal and potentially upsell the borrower to borrow more money from you. There are so many advantages to making use of the tools available to mortgage lenders that you no longer have to sit on the sidelines without having access to the same tools that your big competitors do.
 

Being well prepared from the very beginning can not only save you time and money, it can also help to encourage a strong and fruitful relationship with your client. Not wasting their time is often as important as not wasting your own.

For more about the tools you can access through Purview For Lenders, contact us today at call 1.855.787.8439.

Sneak Peak: Want to Do More Than Just Validate Property Value? Different Lenders Leverage AVMs in Different Ways

There are so many different types of lending institutions that offer mortgage financing: banks, credit unions, finance companies, mortgage investment companies, trust companies, private lenders and more. While Automated Valuation Models (AVMs) have been a tool that have been around since the 1990s, technology has made them more accessible and so AVMs have become common place in many of the different types of lending institutions mentioned above. Never mind the above mentioned types of mortgage lenders – AVMs are also being leveraged cross-departmentally and not just in underwriting. AVMs have been proven to be tools that offer even more value than just validating property value. 

As you may or may not already know, an AVM is a computer generated analysis of a property value which may assess data from multiple sources to generate approximate property values. An AVM should not be confused with an appraisal which will determine a value by comparable sales and/or by the income it produces and takes into consideration interior and exterior condition.

Here are some examples of different departments within lending institutions and how they are using AVMs: 

Underwriting 

·        Many lenders will first generate an AVM as an initial measure and then couple it with an official appraisal if the deal proceeds.

·        An AVM doesn’t just include information about the value of a property - it can also include information about who the homeowner is, sales history, mortgages registered and more. AVMs are most commonly used for different reasons and at different stages in the lending process.

·        AVMs can reduce your overall costs and consistency, as an AVM is inexpensive, available immediately and is completely objective because the program is generating the data.

·        AVMs save significant time with regard to underwriting because problem deals can be identified immediately, before significant resources have been expended on underwriting.

·        Makes tools that larger lenders have available to private lenders who may leverage different information in different ways.  

Special adjudication teams use AVMs to: 

·        Validate broker submitted value.

·        Compare values to active MLS listings. 

Risk management – in risk management many lenders use AVMs to:

·        Verify their current portfolio.

·        Determine price appreciation year over year.

·        Measure housing prices trends against rates.

·        Mitigate mortgage fraud - in the case of the AVMs generated by Purview, there is a section that will flag attributes consistent with fraud. The program will assess active mortgages, recent sales, prior foreclosures, if the vendor is a corporation, that there are no concurring mortgages, active judgements, active cautions, active liens, power of sale, unusual discharges and frequency of power of sales in the course of performing the fraud check. This can significantly reduce instances of mortgage fraud. 

Collections – collections departments often use AVMs to:

·        Assess a property value as a more affordable alternative to or in conjunction with an appraisal.

·        Evaluate the overall value of their collection portfolio.

·        Identify collateral where appreciation has occurred.

·        To locate and not only validate the value of real property assets but also learn ownership information, estimate the equity position and more. This enables you to identify real property assets you can secure/enforce on. You can also identify new addresses for mailing and serving documents. 

An AVM is a very powerful tool in a lender’s arsenal that offers so much savings that the actual cost becomes negligible. If your department is not already taking advantage of AVMs and you see the value you can find out more information at http://purviewforlenders.com/what-is-an-avm-or-automated-valuation-model/ or call 1.855.787.8439.

True or False: Lenders No Longer Require an Appraisal When an AVM is Available?

This is an interesting topic because some confuse the different ways that AVMs are relied upon in real estate transactions. Many lenders use AVMs with other methods of assessing a property value, such as an appraisal. AVM is the acronym for Automated Valuation Model, which is computer generated and produces an estimate of a property value based on analysis of public record data, property location, market conditions and real estate characteristics at a specific point in time. Automated Valuations may be based on a single model or a combination of multiple models. 

Some of the most popular models involved:

·        The House Price Index Model – leverages house price indices (sales in a specific geographic location) to establish a value.

·        Tax Assessed Value (TAV) models – leverages tax assessed valuations to estimate value.

·        Hedonic models – leverages regression techniques to estimate value. 

Simply stated, when a lender uses an AVM tool like Purview to generate an AVM, the application will instantly generate an estimate of the value. It will provide information such as who the current homeowner is, recent sales history, information on the property, indicative market value, comparable sales of similar properties, check the application for attributes consistent with fraud and more…

 

This is different from an appraisal where there is a human element involving an appraiser either driving by or entering a subject property to prepare an appraisal report that will include an estimated market value of a property. An appraiser can derive a value using two popular methods – by comparable sales (which is common with residential properties) and by income method (common with income producing or commercial properties). A full property appraisal will consider interior and exterior conditioning to the benefit/detriment of a property valuation, where an AVM will not. Many lenders will use an AVM at the application stage to determine if an application has merit with respect to the stated value, before bringing the deal through to insurers or before having an appraisal done.

An AVM may be able to identify large discrepancies in value which can enable you, the lender, to go back to your client, agent/broker to probe for more information about the deal/value. This saves you and your partners greatly in the administration of deals that are not likely to close because of undisclosed or misstated information.

So what about the question “true or false: lenders no longer require an appraisal when an AVM is available?” In the end, it will always come down to the lending policy of each organization.  While some lenders will choose to proceed after generating an AVM and without an appraisal, in many cases we see lenders taking advantage of all measures available to them, both AVM and appraisal to make sure they have a firm idea of what their security is worth.

For more about the benefits of using both and AVM and an appraisal in your due diligence, please contact Purview For Lenders today by calling 1.855.787.8439.