Thank you very much, Mr. Chairman, honourable members, and ladies and gentlemen. My name is Keith Lancastle. I'm the chief executive officer of the Appraisal Institute of Canada.
Joining me is our national president, Dan Brewer, who is an AACI, P.App-qualified fully designated member of our association from the Toronto area. We are very pleased today to present our members' concerns and recommendations to the Standing Committee on Finance as you consider issues around the Canadian real estate market and home ownership.
The Appraisal Institute of Canada has over 5,200 members, who provide unbiased opinions of value on residential, commercial, and all other types of real property. Our members are university-educated and complete a rigorous program of professional study. The scope and the conduct of our members' services are defined by our Canadian Uniform Standards of Professional Appraisal Practice. As a self-regulatory body, we have a strong focus on consumer protection. We maintain a robust disciplinary process, and we offer a mandatory professional liability insurance program to help protect consumers. AIC is very supportive of the Office of the Superintendent of Financial Institutions' guidelines B-20 and B-21 and some of the other more recent measures that have been implemented to help stabilize the Canadian housing market. Today, however, we would like to discuss two areas of concern. First, we want to address the risk of potential dilution of sound mortgage underwriting practices across the marketplace. Our second concern is in the area of the increasing potential for, and risk of, mortgage fraud.
In the area of sound mortgage underwriting practices, we know that the majority of Canadian mortgage lending is still being done through federally regulated institutions, but the market share of non-federally regulated financial institutions continues to grow. The inherent risk is that the mortgage underwriting practices of these two categories of lenders may be inconsistent and may over time result in a two-tiered lending system.
The reality is that despite federal policies and procedures to cool the real estate market, there are still many Canadians who are very desperate and determined to enter or remain in the housing market. Some existing homeowners now find themselves in the situation where they must consolidate their debt. In either situation, if borrowers are turned away by a federally regulated institution, they are more likely to look towards other lenders to secure mortgage funding.
We recognize that non-federally regulated financial institutions are a very important part of the market. However, in some cases these lenders serve a cohort of the Canadian marketplace and Canadian consumer base that may be higher risk in nature. Unfortunately, there is limited information available on the full scope of who these lenders are or what their mortgage underwriting practices may be. Put another way, there is a growing share of the market that is not necessarily competing on the same basis and to which the same regulatory oversight may not apply. This scenario, in our opinion, is a potential risk to the financial system and to the housing market.
The absence of a level playing field could well have an unintended impact on the market: first, by essentially increasing the indebtedness of Canadians; second, with higher-risk borrowers entering or remaining in the market, which exacerbates issues around housing demand; and third, through the increasing likelihood of mortgage default in the event of a decline in the real estate market.
We are aware of non-federally regulated lenders that apply very stringent underwriting approaches to both borrower qualifications and collateral valuation. We are concerned, however, about the actions of lenders that may have less rigorous approaches to mortgage underwriting. Guideline B-20 has established a very sound and balanced framework, recognized throughout the world, that requires assessment of not only the borrower's capacity and willingness to repay but also a commitment to strong valuation fundamentals. As we have seen in other countries, the absence of a balanced and consistent approach can and will have a significant impact on the consumer and on the real estate market as a whole.
Like many of the other organizations that have appeared before this committee, AIC agrees that there is a need for the Government of Canada to take time to analyze the impact of recent policies before implementing new regulatory measures. That said, AIC is also recommending the expanded application of guidelines B-20 and B-21 as well as the recently announced measures to any and all organizations that are providing mortgage financing. This step will do much to ensure more consistent lending practices and make for a more stable marketplace.
Second, AIC would like to express our concerns about the potential increase in mortgage fraud. This concern is supported by a recent Equifax study that revealed that instances of mortgage fraud in Canada have risen along with the escalating prices in the Toronto and Vancouver areas. Equifax has noted that “the number of potentially dishonest mortgage applications has grown by 52 per cent over the past 4 years.”
Appraisers have the expertise to raise red flags in a real estate transaction, helping lenders better detect any potential mortgage fraud concerns before they occur. On-site appraisals carried out by qualified professionals are an effective way to help all parties involved in mortgage underwriting to detect fraud and to better mitigate lending and property investment risk. To that end, our recommendation is that all organizations involved in lending work together to better detect potential incidents of fraud. The government can encourage and potentially facilitate sector-wide dialogue and engagement on this topic.
Mr. Chairman and honourable members, we are privileged to have been invited here today to share the perspectives of our members. We appreciate the chance to share our recommendations and would also be very pleased to respond to any questions or comments you may have.
Thank you.