EMILI is a semi-automated risk analysis underwriting tool used by the CHMC when determining the likelihood of a borrower defaulting on their mortgage. EMILI relies on inputs provided by mortgage and real estate brokers and combines that information with existing information from municipalities and the MLS system such as property taxes, sale price history of the property in question and the sale price of properties in the neighborhood.
With this information, EMILI calculates in seconds an appraisal value for said property which the CHMC then compares to the property the borrowers are looking to buy. The borrower’s ability to service the mortgage on the property is then weighed against the assessed value calculated by EMILI and then a decision is made weather or not the borrower and mortgage qualifies to be insured by the CHMC. SIMPLE!
Mortgage lenders and banks simply cannot afford the risk associated with un-insured mortgages, the CHMC provides such insurance. The CHMC has the ability to insure up to $600 Billion worth of mortgage liability in Canada which by the way it has nearly met already. At the end of the day the CHMC is completely protected because its own insurance liability has been underwritten by the tax payers of Canada, what this means is that in the unlikely event of a complete housing meltdown in Canada, every single mortgage lender and provider in Canada should be 100% covered and protected against defaults.. it will in essence be bailed out by you, the tax payer.
So back to EMILI, as mentioned it is a semi-automated system that calculates assessed property values based on user inputs interpolated into algorithmic data. Sounds smart.. not quite, allow me to explain.
The system goes completely un-checked through normal regulatory filters; it is essentially administered by the CHMC and the Canadian Real Estate Association and MLS. The data that is fed into it to calculate property values is subject to fraud and manipulation that can easily lead to unnatural inflations in property values. Here is an example how:
123 Main Street (1555 sq ft.) was sold in 2008 for $250000. ($160.77 / sq ft. )
In 2008 comparable 125 Main Street (1575 sq ft.) was listed on MLS and processed through EMILI as being 1600 sq ft. Fair enough, the Realtor “rounded” the figure up a bit. The property was appraised in part by using data from the previous sale of 123 Main St. which was valued at $160.77 / sq ft. So the appraised value was $257232 instead of $253212 – Property ends up selling for $260000 ($162.50 / sq ft.) as it was in high demand – Very small difference but it goes on..
In 2009 127 Main Street (1655 sq ft.), also comparable to the previous two was listed by the Real Estate Broker as being 1700 sq ft.. again small round up no big deal. So EMILI calculates an assessed value by comparing 123 Main St. and 125 Main St. and their average sale price / sq ft. at $162.50, property is assessed now at $276250 instead of $268938, again a small $7300 difference not noticeable at all. Property sells for asking.
Then in 2010 123 Main Street goes back on the market, it is now listed as being 1600 sq ft. and assessed at $162.50 / sq ft. giving it a value of $260000.. an increase of $10000 from previous sale in 2008, it may not sound like MUCH but it is essentially a $10000 gain in valuation due to ONLY manipulating the square footage figures that are fed into EMILI.
This example is by no means near complete to real life, it does not take into account any other real life factors such as normal market appreciation and influences, it demonstrates ONLY how small fraudulent manipulations of the data being fed into a centralized assessment computational tool without any oversight into the people and methods of data being used can easily lead to false asset inflations.
In the example we only used 3 properties over a small period of time, now imagine a square city block in Toronto or Vancouver with hundreds of condo units changing hands annually, imagine the compounding effect that this sort of fraud and data manipulation can have in the assessed values of these sorts of properties.
So the problem with EMILI is clear, the role it plays in the false inflation of property values especially compounded in dense urban environments is substantial… The question here is when/if mortgage defaults start to rise and the CHMC gets over whelmed with claims from lenders, how many claims will be rejected by the CHMC due to fraudulent applications?