• Mon. Nov 28th, 2022

Lenders are now ‘super picky’ on valuations as house prices continue to fall

ByWillie M. Evans

Aug 15, 2022

As home prices steadily decline in Canada, it’s not just sellers who are feeling the pressure; the effects of a market downturn ripple through the mortgage industry, hard felt by those trying to facilitate transactions.

An emerging challenge is the increased focus on home value assessments. As housing markets falter, mortgage lenders don’t want to end up with the bag based on a home’s previously inflated value. This means that up-to-date reviews – as recent as a few days – are increasingly in demand.

“The one thing I see everywhere, everywhere is that everyone is very picky about appraisals,” says Leah Zlatkin, mortgage expert and broker at LowestRates.ca.

“Assessments have to be very recent and you have to be careful because you’re submitting an assessment that was done a month ago, and most lenders won’t even take it anymore because the market – and prices – change so quickly. “

READ: Homebuyers beware: Rising risk of valuation gaps in a falling market

House prices tumbled across Canada, following a rapid rise in interest rates and mortgage costs. According to the Canadian Real Estate Association, the national average house price fell 5% year-over-year (year-over-year) in July, marking a second consecutive annual decline. Most of the price declines were concentrated regionally in Ontario and British Columbia; in the Greater Toronto Area specifically, prices last month were up just 1.2% – the lowest year-on-year increase since April 2020.

Zlatkin says that when conditions shift into buyers’ market territory, lenders start asking for the most recent valuations, adding that the last time this trend appeared was during the 2007-2008 recession. Fast-declining property values ​​make lenders nervous, she adds, especially when buyers have just 20% down.

“You buy a house and if the value of that house increases between the date you bought it and the date you closed it, then your lender has a lot of security knowing that the asset they are lending against continues to grow in value,” she said.

“[But] if the value of the property drops significantly during that time, the lender has agreed to pay you x number of dollars based on a 2 month old appraisal in an 8% down market. This puts a lender in a very precarious position and the first thing lenders need to do is protect the lenders who are backing these mortgages.

“‘When was this’ has become much more important”

Real Estate Agent and Chartered Accountant in Toronto Scott Ingram says that as the market turns, buyers have also become much more conservative when it comes to comparable sales in the neighborhood; Gone are the days of throwing hundreds of thousands of dollars asking in the bidding war ring.

“People don’t do that anymore, they come back in line with the comps more,” he told STOREYS. “Today’s competition is different from [before]. It’s important not to just say, ‘Okay, what was the last house sold on this street?’ Now, ‘when was that?’ is much more important. ‘Oh, is this a March 1st sale?’ I would treat this differently than looking at a July 1 sale to determine my comps.

It boils down to an increased workload for appraisers, who have to turn over lenders faster, but with the same size staff. This has made valuation professionals a hot commodity, Zlatkin says.

“It’s actually very difficult to get evaluators right now. There is a bit of a delay,” she said. “I was talking with one of my appraisers this morning – so the head of one of the appraisal companies was right in our office – and I was talking to them about the timelines and delays for their appraisals and they were telling me in this moment they’re trying really, really hard to meet their five- to seven-day SLA [service level agreements].

She adds that in cases where her company has connections, reviews can sometimes be expedited, but that location is a predominant factor; a property in the GTA can be assessed faster than a property in a rural or suburban area. Fewer overall comparables, due to lower sales volume, also leads to difficulties when valuing properties, she says.

“Because the market isn’t moving as quickly as we’ve seen in the past, you have to be very aware that this house that sold in this neighborhood three months ago, the valuation of this property, even if it’s the exact same cookie-cutter house, is probably very different from the appraisal they have to do on your current property,” says Zlatkin.

A Vancouver homebuyer has experienced the fallout of slower appraisals first-hand; as reported by the Vancouver SunJacqueline Schaffer, the first buyer, found herself in a financial bind when her appraisal – completed 10 weeks after her purchase – was lower than what she had offered for the house.

“An appraisal should have been ordered at the time of purchase, especially in an environment where it was evident that prices were starting to fall and interest rates were rising,” said Vancouver realtor Steve Saretsky, quoted in the item.

Industry professionals under pressure to adapt

The Appraisal Institute of Canada (AIC), the industry’s national nominating organization, says valuation professionals have had to adapt quickly to changing conditions as the market evolves during the pandemic and its aftermath.

“There is always a tension between the available supply of appraisal services and the demand for them, given that the real estate market is cyclical,” wrote Paul Hébert, director of communications at AIC, in a statement to STOREYS. “Demand is determined by many factors such as: market activity, competition for loans, interest rates and available inventory.”

He adds that new candidate members enter the profession each year, in accordance with their educational and credentialing requirements.

However, “it’s an evolving landscape, and all stakeholders are constantly working to adapt.”

“The COVID-19 pandemic continues to bring challenges that require adaptation, particularly in situations where appraisers cannot personally inspect the interior of a property (due to a variety of factors) and they must take appropriate precautions (PPE, physical distancing, etc.)”, it states.

Moreover, specifies Hébert, the evaluators appointed by the AIC are bound by the professional industry standards act to provide real-time market values, and that “current market forces (inflation, interest rates, declining sales, declining values) may impact additional due diligence by lenders in terms of verification of the warranty”.