Finance Committee on Feb. 8th, 2017

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I would like to go back to another question that I asked previously and that may affect Quebec, Nova Scotia or the appraisers. I will start with Quebec.

The overheated market issue is a priority. That is why the government has dealt with it. Overheated markets are more of a concern in Toronto, Vancouver and Regina than in Montreal or Quebec City. As you mentioned, those markets are going to suffer because of it. The problem is the regulations on banking and mortgages that are in federal jurisdiction. Quebec will be more able to come up with its own suggestions, however.

How can we get Quebec City and Ottawa, as well as Halifax and other governments elsewhere in the country, working better together, working hand in hand to come to grips with the overheating without affecting the other markets?

[Pénéla Guy]

People often say that all politics is local. It is much the same for the real estate market. The market is local. It is true that mortgage matters are in federal jurisdiction. There, as in many other areas, there needs to be a way for the federal government to work with provincial or municipal authorities, even in areas of regional disparity.

I don't know if Mr. Cardinal has any other ideas on the subject.

My suggestion would be to keep analyzing the regional repercussions and the decisions to be made before doing anything.

[The Chair, Liberal, Wayne Easter]

Thank you.

Do you have a comment, Mr. Lancastle?

[Keith Lancastle]

I would simply say that while real estate markets are local, there is interaction among national-level players, provincial-level players, and local-level players. It's important to engage all of those in developing solutions that respond to markets, whether they are particularly heated markets like Toronto and Vancouver or other markets that may be facing some challenges or that are more stable. Unfortunately, it's a very complex set of interactions.

Again, we fall back to the base principle that the regulatory framework that's been in place federally has served the Canadian market well, and building on that seems to make sense. History has shown that it has worked well in all Canadian markets across the country.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair

Thank you to the witnesses for coming today.

The purchase of a home is the most important purchase that any Canadian citizen will make. I still hear stories about how my parents saved and saved and bought their first home in Brampton. They also complained about the double-digit interest rates they were paying in the housing market in the early 1990s, and the concerns they had back then.

The housing market in my neck of the woods doesn't come up in conversation on a regular basis, except for mention of how hot it is and how there's a shortage of supply that's driving up the price of homes and how people are concerned about that. Even for people who have paid off their mortgages, their house is still their number one asset, and they're still concerned about the overall housing market. They don't want what happened in 2008 in the United States to happen in Canada.

My question is on appraisals, because I've been hearing feedback, and you're the only witness who has brought up the concern of mortgage fraud—this comes through the appraisals as well. Homes are being appraised at over value so that people will qualify for a larger mortgage. Couple that with mortgage fraud and you're stretching yourself. You're very leveraged, and I feel that is the biggest concern in the market and it's not visible.

Your comments on that would be really appreciated.

[Keith Lancastle]

The issue of mortgage fraud is also very complex. From interactions with our members, we are aware of situations in which they've prepared an appraisal report and somewhere along the road the base amounts have been altered, so hypothetically a member prepares a report valuing the property at $750,000 and at the time of mortgage origination, the report has been altered to $850,000. In those types of scenarios our members are collateral damage, if you will, to the fraud. They're unwillingly involved in it.

Through the appraisal process we are able to help identify some of the potential red flags. For example, our standards require our members to provide a detailed three-year sales history of a subject property, so if incidents such as flipping are creating a fraudulent situation, those can help raise red flags. Certainly we can do things like identify the occupancy of the home. If the property is being appraised as an owner-occupied development and you find out when the appraiser arrives that the owner is not occupying the development, that too is information that can provide insight to the lender to help address fraud.

When we're looking at the 52% increase that Equifax quotes, it is important to recognize as well that mortgage fraud is a very broad term. I've heard it phrased as shelter fraud, whereby I provide a gift letter to my children indicating there is no expectation that they will pay me back, but behind the scenes they have every intention of paying me back. They're doing that to acquire shelter. They're not doing that to defraud the system, but technically and notionally that is, in fact, mortgage fraud.

It's good to have the understanding that appraisers can be part of the process to address that. Again there are numerous examples we've been informed of in which our members have been collateral to that. They have not been involved in the process but have found out later in the process that their work has been doctored to help perpetrate a fraud.

[Raj Grewal, Liberal, Brampton East, ON]

From a practical perspective, let's say you appraise someone's home. Does your appraisal report go directly to the mortgage lender? Would it go directly to the bank?

[Dan Brewer, President, Appraisal Institute of Canada]

It depends on your client. In most cases it will go to the lender because it will be the intended user of the report. It will be the one relying on it.

[Raj Grewal, Liberal, Brampton East, ON]

What would be another scenario? Would the real estate agent get it?

[Dan Brewer]

That's highly unlikely. In most cases it is prepared for the intended user, who would ultimately be the client, who would be the lender, typically.

[Raj Grewal, Liberal, Brampton East, ON]

Is it rare for the lender to verify the report, or do they take it as a report with a checklist of their required documents and that's the end of it?

[Dan Brewer]

Many lenders have safeguards and policies in place whereby original documentation must be received from the appraiser, so there are some safeguards, such as electronic signatures digitally secured. They have some mechanisms with respect to policies to protect that process.

[Keith Lancastle]

One of the efforts our organization has been involved in, for instance, has been to work with lenders to help them better understand how they can look at an appraisal and make sure a fraud has not been perpetrated as a result of it. Those are some of the things they might potentially want to consider.

[The Chair, Liberal, Wayne Easter]

Do any of the other witnesses want to add a comment on this segment? We're out of time.

David, do you?

[David Graham]

No, I'm fine.

[The Chair, Liberal, Wayne Easter]

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

I thank all of our witnesses for being here today. When we had OSFI and the Canada Mortgage and Housing Corporation here, they never once used the word “fraud”, so I hope the government members aren't trying to spin any of this to say these rules are being put in place to prevent fraud.

However, I'll go right to you, Mr. Lancastle. I appreciate your being here. On page 3 of your briefing note, you say:

Despite federal policies and procedures to cool the real estate market in recent years, there are still many Canadians who are determined to enter the housing market. If they are turned away by federally [...]regulated institutions due to newly implemented policies and OSFI regulations, the unintended consequences may be that borrowers are turning towards less regulated (including second tier) lenders to secure funding at a higher interest rate.

Now, in the earlier session, I asked about this specifically, because I've heard from a credit union that it's seeing a large uptick in second mortgage activity. Is that the kind of behaviour you're talking about, sir?

[Keith Lancastle]

Anecdotally, our members are informing us that they are now seeing an increased level of activity in appraisals for second mortgages that seems to coincide with the introduction of the change to some of these requirements. It's for that reason we believe that all organizations that are involved in providing mortgage financing, whether it be first, second, or third, should comply with the same level of rigour in terms of the assessment of the borrower's capacity to pay and the valuation of the collateral.

The concern is that there are people in the second mortgage space that apply very stringent underwriting criteria. That is not the same degree of risk as it would be with someone who would not necessarily apply that degree of rigour. We think that levelling the playing field across the mortgage market is the most sensible approach and is ultimately the best tool to preserve the stability of the Canadian market.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you.

I'm going to go to you, Ms. Guy. In British Columbia, we have what we call “stratas”. That's what we call condominiums where someone will take the shared ownership and pay a strata fee every month. I understand that you have something similar in Quebec. Is that correct?

[Pénéla Guy]

Yes, shared ownership exists in Quebec.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay. Just so we're on the same page, that's what I'm speaking about.

Earlier, Ms. O'Connell mentioned people being pushed out of the market.

Well, some people may stay in the rental market, and of course there are unintended consequences that will happen because that economic activity won't happen, as Mr. Graham mentioned in his comments. Other people may find out that they have 18% less purchasing power and may say that instead of buying a single detached dwelling in a suburb, they'll go with a strata or condominium. Oftentimes, the perverse reality of it is that there will be strata fees that end up being more expensive than a single dwelling, so this actually puts more pressure on their household income, and they don't get what they want.

Have you heard of this kind of thing happening?

[Paul Cardinal]

I'm not convinced that shared ownership increases costs for those people who choose it. Geographically speaking, it always depends on where you are. That said, as you mentioned at the end of your question, it may not be the choice these people want to make.

Take the example of a couple expecting their second child, and who would have liked to have bought a single-family home with a certain number of bedrooms and a small backyard, but whose borrowing capacity doesn't allow them to do so. Under these conditions, these people may have to opt for something a little smaller—an apartment or a townhouse, for instance. This doesn't correspond to their first choice, which they might have made before October 17, 2016.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I have a lot of anecdotal cases of friends over the years in Vancouver who made the decision to go to a strata because they just couldn't afford to get into the market, and now that's going to make it even worse for the next generation of homeowners.

Mr. Graham, there's been a lot of talk about how we need to focus on supply and not just on demand, and one thing that is within the Government of Canada's own sphere of influence on this is the GST or HST rebate on new home construction. We want to maybe start talking about ways we can do this. Would that be a way that the federal government could possibly incentivize new home construction through the tax system?

[David Graham]

I would say very much so in the eyes of the Urban Development Institute and the Nova Scotia Home Builders Association. We both advocate for that.

Over the last 10 or 15 years in Halifax, there have been increased regulations. There have been increased fees. We're trying to do our best to assess exactly what that amounts to in terms of the dollar amount that takes away from the narrowing profit margin for house builders. House builders have left the market, either willingly because they've decided they can't make any money in that industry in Halifax—and I'm speaking of Halifax in particular, the biggest region in Atlantic Canada—or because they've gone bankrupt. A number of fees, taxes, and regulations have culminated in that. They come from a variety of different government bodies—they could be provincial or municipal—and they accumulate. They've really taken a bite out of the profit that allows people to stay in the business.

I am very much in favour of your point as an idea.