# Banks Tighten Lending ?



## sags (May 15, 2010)

Garth Turner had an article on his blog, and I have read several other articles in local news media, that seem to indicate the banks are slowly tightening their lending criteria............especially for non-CMHC mortgages.

Could it be the new CMHC lending rules is having an unwanted affect ?

In the Turner article...........a person wanted to buy a $600,000 property outside of the GTA. They signed the papers with a home inspection requirement. They had a 20% downpayment and a $40,000 deposit so CMHC insurance wasn't required.

The home inspection passed and the condition was waived. Then came the home appraisal.

The bank appraised the home for $400,000..........$200.000 less than the purchase price.......and because it was a "rural" property they would only lend 65% of the value.

The home buyer was expected to make up the shortfall. As they had a contract to buy the home.........and didn't have the funds to complete the deal.........they were in jeopardy of losing the deposit of $40,000.

If appraisals start coming out way low for homes to protect the lenders......purchasers need to be careful in their contracts.......but sellers will bear the brunt the most.

They won't be able to sell their homes for the full market value...............and prices will fall.


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## MRT (Apr 8, 2013)

Then the buyers (and their agent, if they used one) were EXTREMELY foolish for signing a contract without a financing condition (despite this happening far too often). If the vendor wouldn't allow it, then the buyers willingly took on the risk that this very situation might occur. IMHO, not allowing financing conditions should be illegal and I feel that it is a highly irresponsible practise within the industry.

People seem to forget that financing entails a covenant (borrower) AND security (property) component. Even if you have zero doubt that you qualify for the amount you need, the property (and price being paid for it) must be satisfactory to the lender and there are too many variables to know with certainty that everything will be fine. 

it is hardly a new phenomenon that appraisals fail to support a contracted price, particularly in certain situations (bidding wars being the obvious example), and people are wrong to assume that whatever price is agreed upon is necessarily representative of market value. Even new construction prices are sometimes not supported by a lender and/or CMHC. Also, the value may be supported, but some other detail may not be acceptable to the lender (condition, zoning, location, etc), so it is more than just price that can be an obstacle. 

Having said that, there are often HUGE discrepancies between appraisals of the same property, simply by virtue of using different comparable sales or in the adjustments made for differences between them and the subject property, so the homeowners could try to ask for a 2nd report from another appraisal firm or go to another lender and have them complete one. They should also be questioning their agent (if they used one), as a market comparison should have been done well in advance of negotiations. This is admittedly tougher for rural properties though where subjectivity can be much greater and recent sales may be sparse vs. cookie-cutter condos where comparable sales may be plentiful and units virtually identical.

It it tough to comment further, without knowing more details about this particular situation, but it is yet another example of where a failure to have a financing condition can bite you in the butt big-time.

Lenders are indeed tightening up, but that should have no bearing on independent appraisal values. Banks don't really "do" appraisals, they either use electronic valuation services (such as CMHC's offering) or contract to third parties, so this type of problem shouldn't be a consequence of any change in guidelines, but...


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## Pluto (Sep 12, 2013)

sags said:


> Garth Turner had an article on his blog, and I have read several other articles in local news media, that seem to indicate the banks are slowly tightening their lending criteria............especially for non-CMHC mortgages.
> 
> .


Very interesting. If true, and I don't doubt it, the banks are worried without being too explicit about their worry. Their tightening policy seems to imply they see some serious interest hikes in the not too distant future. Remember Mark Carny? Apparently he has warned the UK that rate hikes may come a lot sooner than they expect. So what's going on? Inflation, like a pesky gopher, is sticking its head out of its hole. US inflation over the las few months has come to life. If it persists, that means rate hikes, and a devaluation of assets that to some extent rely on interest rates.


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## Mortgage u/w (Feb 6, 2014)

I agree with MRT - foolish to not have conditioned for financing approval. I don't know why anyone would not use this condition - it benefits both the seller and buyer.

As for the banks tightening up, well, it is overdue. As B20 and B21 rules unfold, all lenders are being forced to adhere to them and is of course affecting insured as well as non-insured mortgages. But this 'tightening up' has not much to do about valuations as in your example. Where the B20 rules affect borrower qualification, B21 is more aimed towards conformity.

In my lending experience, I am seeing more and more valuations coming in lower than expected, but its a normal phenomenon. We experienced a sharp increase in property values just recently and people seem to still be on that upward trend. The trend is still on the rise but not as inclined. Appraisals are based on recent sales so the fewer the sales, the fewer to compare too. Also, some properties are staying on the market longer where the seller is forced to reduce his price stimulating a quicker sale. All this is drastically affecting prices. We are in a time period where prices are slowly leveling off....so there will be lots of variations in the mean time. Once it stabilizes, I predict the demand will still be there forcing sales and prices on the rise again. I am one who does not believe in a real estate crash coming, as most are predicting - I actually find that assumption (market crash) very amusing!


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## birdman (Feb 12, 2013)

It seems to be an appraisal problem as opposed to the bank tightening the rules and lending 65% of the lower of the purchase price or appraised value for a rural property does not seem out of line. One would have to read the appraisal to see the comparatives, replacement cost, land values, etc. Also, it would be interesting to know if it was a "Bank" appraiser or an independent. Something seems to be missing here??????


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## Just a Guy (Mar 27, 2012)

No, the banks hire the appraisers and those appraisers are often a lot more conservative than others.

It's been getting harder and harder to borrow money since about 2008. It was bad then, but it's gotten a lot worse since then...and this is from personal experience. 

That being said, even when banks say no, it doesn't mean you have to accept that. You could try a different bank, a mortgage broker, or even argue with your bank that rejected you...

For example, my bank has probably initially rejected me on every mortgage I've asked for...and once I get it, they warn me that I'd not qualify for any more...of course, I've added 4 or 5 in the past few months, and will add another one soon...

It's not easy, but it's not impossible...it's a game.


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## sags (May 15, 2010)

LOL..........love your attitude..........

Bank.........we can't lend you anymore

You...........okay, I am going looking for more properties to buy............

LOL..........


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## RBull (Jan 20, 2013)

sags said:


> LOL..........love your attitude..........
> 
> Bank.........we can't lend you anymore
> 
> ...


Yeah, and this part.... Give me a call when the papers for the mortgage you won't give me are ready for my signature. LOL


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## Just a Guy (Mar 27, 2012)

You forget the one little secret...

It's the one that works against the banks, even though they say they don't want to lend...

The one I continue to exploit...

Banks are greedy...they always find a way to bend their rules to make a few more dollars.

I find it hilarious when I buy a property from the same bank that just foreclosed on it and go back to them and they give me another mortgage on it...

"That place just cost us a small fortune, but let's try it again..." 

Of course, when I buy it the numbers work, and chances are, if it was a CMHC property, they didn't actually lose a dime, but I still find it funny.

Banks have a hard time walking away from a clear title property (which all mine technically are when I approach the banks having bought them with other loans)...they've always found a way to get me the papers...of course they swear it's impossible...


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## birdman (Feb 12, 2013)

Re appraisal Just a Guy. When I was in the business we had our own Appraisal Division that worked for us as well as doing outside work for others. We eventually sold it in order to ensure the appraisals were independent but in any event, they were regularly challenged for accuracy in terms of valuations; either high or low. Appraisals would be reviewed carefully but my initial thought is that I would be hard pressed to purchase a property where the appraised value varied significantly from the purchase price. Financial institutions want realistic accurate appraisals and if they wish to limit their exposure or risk they simply reduce their loan to value ratios. The first to be reduced is often recreational properties, raw land, and then perhaps rural. Also, while not certain, I would think that appraisers are bound by their professional association to provide and accurate valuation of the property. We always felt a 5% swing was the margin of error. Now, if property values are trending lower and are backed by appropriate data then perhaps the lower appraisal could be justified. Like I said previously, something seems to be missing here as I cannot see an appraiser reducing the value of a property by 30% without good reason. Did the purchaser see the appraisal? An appraisal company would not be in business very long if they simply reduced the appraised value versus actual value for no reason.


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## Just a Guy (Mar 27, 2012)

I remember one time, back about 3-4 years ago, during the meltdown in the USA, no one was lending anything...

There was a major property I wanted to buy, everyone rejected my proposal at least twice...every bank, every credit union, everyone all said no. So I reworked my numbers, and approached them all again...maybe talking to a different division (turns out bank divisions all have different rules, personal, small business, large business, private client, agriculture, etc.).

At one point, I even knew one of the managers personally, who could vouch for the numbers...still got rejected higher up the chain.

Ironically, TD eventually gave me the loan after they'd rejected me 3 pervious times from 3 different divisions...not only that, but they also gave me the mortgages on two smaller properties at the same time...so, after 3-4 months or so of rejections, from everyone, they gave me not one, but three.

As it was a large deal, and the market was stalled, 3-4 months didn't really affect the deal.

Maybe it's really a test to see if you're serious about wanting the money.


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## Just a Guy (Mar 27, 2012)

If I ever decided to go to work Frase, I'd want to be a bank appraiser...

"What did you pay?" 

Take a quick look, pull some numbers to make sure it's not completely bogus...

"Okay, it's worth $10-15k less, where's my $500?"

Seriously though, it depends on who the actual guy is...I've come to know the standard guys they send out. One of them is just brutally low. There was one we bought last year for $73k (it was actually two suites on one title), city assessment was 200k, we redid the interior, and had it rented for $1600/month...his appraisal came in at $85k. Basically he said that the suites were worth 40 & 45k respectively in a city where nothing sold for less than 73k (when I did my tax appeal last year, I pulled all the low end sales for the entire city, it turned out I'd bought 4 out the 10 lowest priced units in the whole city). 

Fortunately, the other unit I was financing at the same time had a different appraiser and between the two I got all my money back out.

So, going to a different bank, who will hire their own appraisers, may just solve the problem.


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## birdman (Feb 12, 2013)

Decided to sell our home myself and the first thing I did was get an appraisal from a respected firm I knew. The appraisal seemed low by about 10% and we were in a fairly hot market. I sold the property for just over 10% higher than the appraised value and promptly had a meeting with the owner of the appraisal company. He refunded the appraisal cost with his only defense being that the market was changing very quickly and in this case sometimes market values can be higher than appraised values. Really? Its still an appraisal problem. Finally, as has been suggested before, when purchasing a property why would not one put in a subject to clause "subject to a satisfactory appraisal". As a purchaser I have always done this. Appraisal can often bring up negative issues which you may not be aware of.


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## dougboswell (Oct 25, 2010)

I agree with those who suggest it is not a case of banks tightening their rules but where the appraisal is being done and by whom. Two different valuations by two different appraisers can vary greatly. They may have used different comparables for properties listed and recently sold. If they are using the replacement method the number they give for cost per sq foot will have an effect. Rural properties, which is the case here, may involve septic and wells. 65% is a good maximum LTV. The lender is taking the risk and generally the rural properties will take longer to sell if the lender is forced to foreclose. The longer it takes the more money it costs them because they are responsible for the property until sold. Finally the real estate agent should have done their due diligence and looked also at comparables to come up with a realistic price. Also the buyer should have insisted upon a mortgage approval clause. The lender would have made an approval conditional upon an appraisal. If a mortgage is not to be CMHC insured appraisals are ordered. The buyer would have been able to walk away in this case. Interesting no one has stated what happened to the buyer and the property in the end.


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## Mortgage u/w (Feb 6, 2014)

APPRAISALS: Banks or underwriting offices do not have in-house appraisers. All appraisers are independant and values are not influenced by third parties. Majority of underwriting offices today order appraisals through a sort of brokerage channel media; basically a company that manages all appraisal requests and assigns to the closest appraiser in relation to the property. 

You can have 2 appraisers evaluate a property the same day and still have 2 different values. Market values are not an exact science. You're not pricing bananas to match your local competitor. Even if comparable sales show an average sale price of $500,000, it doesn't mean a sale price of $515,000 is off. It just means someone is willing to pay slightly higher because they value the nice landscaping the house has to offer. If values were solely based on past sales, the RE market would never move. 

LENDING: Here again, not an exact science. Like JAG said, if you take the first refusal for granted, you will not get very far. Getting a loan approved is all about how your file is presented. This is where a good broker will come in handy. The relation with the lender or underwriter is also key. Underwriters need to get your file to fit their guidelines, but they also need to need to get a good vibe with your profile. If you omit information or provide misleading information, it will be found and will force your file to get scrutinized - eventually declined. If your file is complete and well presented, good chance you will merit an exception and bypass some guidelines.


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