{"id":127364,"date":"2025-03-12T00:23:39","date_gmt":"2025-03-12T00:23:39","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/real-estate\/what-is-a-blanket-appraisal-and-why-is-this-problematic\/"},"modified":"2025-03-12T00:23:39","modified_gmt":"2025-03-12T00:23:39","slug":"what-is-a-blanket-appraisal-and-why-is-this-problematic","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=127364","title":{"rendered":"What Is A “Blanket Appraisal” And Why Is This Problematic?"},"content":{"rendered":"


\n<\/p>\n

\n

What\u2019s the difference between\u00a0fraud<\/em> and a bright idea?<\/p>\n

Seriously.\u00a0 I\u2019m asking for a friend\u2026<\/p>\n

One might argue that the line between love and hate, right and wrong, and insanity versus normalcy is very thin, and often subjective, and in the case of the financial markets and the lending world, we\u2019ve seen some interesting examples of the \u201cfine line\u201d over the years.<\/p>\n

We\u2019ve all read\u00a0The Big Short<\/em> and we\u2019ve all seen the movie as well.<\/p>\n

We all learned that, during the Financial Crisis in the United States in 2007 and 2008, subprime mortgages were being repackaged and sold as collateralized debt obligations \u2013 complete with Triple-A Ratings<\/em> from the ikes of Moody\u2019s and S & P\u2019s.<\/p>\n

Was this fraud?\u00a0 Or was it just a bright idea?<\/p>\n

Who could really tell the difference?<\/p>\n

The first time I heard of something called a \u201cblanket appraisal,\u201d\u00a0 I couldn\u2019t help but wonder how this was legal.<\/p>\n

Imagine that you\u2019re purchasing a pre-construction condominium or a house that\u2019s to be built by a developer, and these are closing well into the future.<\/p>\n

Now consider the bank that says, \u201cWe think this is worth $500,000 today, since that\u2019s the price you paid to buy it, so we\u2019ll\u00a0guarantee<\/em> you a mortgage to reflect this price when you close.\u201d<\/p>\n

No problem, right?<\/p>\n

That is,\u00a0so long as prices continue to appreciate!<\/em><\/p>\n

As I have mentioned many, many times before, I got into the real estate industry in 2004 when pre-construction prices were\u00a0lower<\/em> than comparable resale.\u00a0 This seemed to make perfect sense to me.\u00a0 Pre-construction condos aren\u2019t built yet, and they carry inherent risk!\u00a0 Surely there should be a reward for purchasing a unit.<\/p>\n

Over time, the price of pre-construction condos drew even<\/em> with comparable resale, and that made no sense to me.<\/p>\n

Eventually, as history shows, pre-construction condo prices rose to be\u00a0higher<\/em> than comparable resale, and this is when I really began to rant and rave here on Toronto Realty Blog.<\/p>\n

I\u2019m of the mindset that the person who paid $1,000 for pre-construction, when prices for resale condos were at $800, is\u00a0still\u00a0<\/em>an idiot when five years later, his condo is worth $1,200 per square foot.\u00a0 Yes, he\u2019s up 20%, but why did he pay a premium in the first place?<\/p>\n

Nevertheless, with pre-construction condos selling out through 2022 and 2023, and with prices rising, this was never a problem.<\/p>\n

But as we all know, pre-construction sales have dried up.<\/p>\n

Urbanation: \u201cGTHA New Condo Sales In 2024 Were Lowest Since 1996\u201d<\/a><\/p>\n

Yeah, no kidding.\u00a0 And as an agent who has\u00a0never sold a single unit of pre-construction in twenty-one years,\u00a0<\/em>I saw this coming a long time ago.<\/p>\n

But what happens to people who bought from 2018 through 2023?\u00a0 What happens when they go to close?<\/p>\n

Here\u2019s an article that many of you would have seen last month in the Globe & Mail:<\/p>\n

\u201cToronto Buyers Left In Lurch As Preconstruction Condos Now Worth Less Than Original Value\u201d<\/a><\/p>\n

As I remarked last month, the market doesn\u2019t have to decline\u00a0at all\u00a0<\/em>for pre-construction condos to leave people underwater once they\u2019re ready.\u00a0 If you\u2019re paying a 20% premium, then a market that doesn\u2019t increase by 20% leaves you behind.<\/p>\n

From the Globe & Mail article:<\/p>\n

\n

During the real estate frenzy in late 2020, Joe Baradziej decided to buy a $2.195-million preconstruction condo in his tree-lined neighbourhood of Leaside in midtown Toronto. He provided the developer with a deposit of $439,000, the equivalent of 20 per cent of the purchase price. His two-bedroom place with a grand view of city was on the fifth floor of an eight-floor luxury condo building.<\/p>\n

When the building was nearing completion last fall, Mr. Baradziej got the property appraised in order to secure a\u00a0mortgage. Documents viewed by The Globe and Mail show the appraisal came in at $1.6-million \u2013 27 per cent below his purchase and sales agreement, a legally binding contract with the developer.<\/p>\n

Lenders will only provide a mortgage based on the appraised value, so Mr. Baradziej was on the hook to bridge the $595,000 gap. He could not sell the rights to his contract, also known as an assignment sale, until the developer sold 90 per cent of all the building\u2019s units, a common practice in the industry.<\/p>\n<\/blockquote>\n

We can debate the decision to purchase a 2-bedroom, pre-construction condo for $2,195,000, another day.<\/p>\n

Today, let\u2019s look at the fact that his appraisal is 27% below the purchase agreement.<\/p>\n

That<\/em> is the purpose of today\u2019s blog and that is where the concept of a \u201cblanket appraisal\u201d comes into question.<\/p>\n

Later in the article, we\u2019re told:<\/p>\n

\n

According to documents viewed by The Globe, the developer, Gairloch, sent him an e-mail saying it had partnered with Royal Bank of Canada to offer a so-called blanket appraisal, which would allow buyers such as Mr. Barardziej to secure mortgages for their units by having the bank appraise the unit at the original contracted price. Mr. Baradziej declined.<\/p>\n<\/blockquote>\n

What\u2019s this?<\/p>\n

A blanket appraisal, you say?<\/p>\n

Oh, you had my curiosity, but now you have my attention!<\/p>\n

A blanket appraisal is a financing agreement where the lender finances the loan based on the original purchase price of a newly-constructed property rather than the property\u2019s current appraised value.<\/strong><\/p>\n

What do we make of this\u00a0<\/em>arrangement?<\/p>\n

Consider the situation above that was reported in the Globe & Mail.\u00a0 The buyer paid $2,195,000 for the condo but it was appraised at $1,600,000, and yet the \u201cblanket appraisal\u201d will allow the bank to advance funds based on a value of $2,195,000.<\/p>\n

Does this make any sense?<\/p>\n

How is this legal?<\/p>\n

I spoke to a contact who I know and trust and he said that this has been around for quite some time\u2026<\/p>\n

\u201cThis has been happening forever, it\u2019s not a new program.\u00a0 It\u2019s been around for a decade or more and it was never an issue because of how it was used.\u00a0 RBC was best known for offering this, and they would price a mortgage above market value and basically say, if you want to buy a detached house that\u2019s done in eighteen months, they\u2019ll guarantee the pre-approval but if current rates were 4% they would offer you 4.89% and you\u2019d get the mortgage.\u00a0 It gave the buyers peace of mind to buy into the future.\u201d<\/p>\n

Sure, but what about the\u00a0risk<\/em>?<\/p>\n

My contact added:<\/p>\n

\u201cThe credit risk for somebody like a Royal Bank was just fine when prices were going up and buyers\u00a0weren\u2019t\u00a0<\/em>buying at massive premiums to resale.\u00a0 This was win-win.\u00a0 The banks get their loans, the buyers get their mortgages, and the developers get the project financed.\u00a0 Consumers got peace of mind and a guaranteed mortgage, then if the market was better in two years or five years when the property was finished, they could always shop around.\u00a0 And Royal Bank would get a mortgage with an above market rate while retaining a new borrower.\u201d<\/p>\n

But that was\u00a0then<\/em>.<\/p>\n

And this is\u00a0now<\/em>.<\/p>\n

So the questions I would ask are these:<\/p>\n

1) Why didn\u2019t we plan for a situation where prices are\u00a0lower<\/em> and appraisal values are lower?<\/p>\n

2) How in the world is this legal?\u00a0 What does OSFI think about this?<\/p>\n

Storeys.com did an excellent piece in February where they interviewed mortgage broker, Ron Butler, and real estate lawyer, Mark Morris.<\/p>\n

Here\u2019s the article:<\/p>\n

\u201cExperts Caution Against Blanket Appraisals, Calling It A \u2018Questionable Practice’\u201d<\/a><\/p>\n

From the article:<\/p>\n

\n

\u201cThe risk profile of the transaction, from a bank\u2019s perspective, has increased,\u201d Morris says. \u201cBut the interesting question is why. Why is this happening? What do the banks get out of it?\u201d<\/p>\n

For today\u2019s condo builds, where you\u2019re looking at a several-year-close in a distressed market no less, blanket appraisals are a different beast entirely. Now, you\u2019re dealing with banks (not just RBC) that are offering these blanket appraisals because they\u2019ve supplied, say, a $500-million construction loan to a condo builder, only to have those projects on the brink of distress because the individual buyers aren\u2019t qualifying for the lending they expected to.<\/p>\n

\u201cSo the bank says, \u2018We have this half-a-billion-dollar loan, we need the condo corporation to close, so we need enough of the buyers to be able to complete their financing in order to close with our builder.\u2019 And therefore, it\u2019s in their best interest to make it easier for buyers to get an individual mortgage,\u201d Butler explains. \u201cIt\u2019s about changing one big half-a-billion-dollar problem into 100 or 200 smaller problems, of which some of them will be no problem. And if you\u2019re a bank, that\u2019s risk management.\u201d<\/p>\n

Morris points out that if the bank\u00a0doesn\u2019t<\/em>\u00a0offer these blanket mortgages, they end up \u201con the hook\u201d for the construction financing. \u201cIn other words, blanket appraisals can benefit the bank as much as they do consumers who are seeking to avoid breach,\u201d he says. \u201cThat\u2019s the nefarious part.\u201d<\/p>\n<\/blockquote>\n

I think that we can all agree that there are \u201cbenefits\u201d to blanket appraisals, but my question is: should there be?<\/p>\n

When the market is hot, the blanket appraisals benefit the lender, the borrower, and the developer.\u00a0 Everybody wins.<\/p>\n

But when the market retracts and those inflated pre-construction condo prices from 2020 are nowhere near values in 2025, who really benefits?<\/p>\n

Wait, that\u2019s the wrong question.\u00a0 Because the lender, borrower, and developer\u00a0still\u00a0<\/em>benefit.<\/p>\n

Who loses in all this?<\/p>\n

The Canadian taxpayer<\/em>.<\/p>\n

Don\u2019t forget, these \u201cinsured mortgages\u201d are insured by CMHC.<\/p>\n

So what, exactly, is the CMHC insuring?<\/p>\n

Consider the purchase of a pre-construction condominium in 2020 for $600,000, which was never worth that amount, but hey \u2013 that\u2019s how pre-construction works, right?<\/p>\n

Now in 2025 when the condominium is finished, the unit is worth $500,000.\u00a0 On a good day.\u00a0 And that\u2019s what the appraisal shows.<\/p>\n

But the blanket appraisal allows the lender to advance financing based on a $600,000 \u201cvalue.\u201d<\/p>\n

And what if the buyer is only making a 10% down payment?<\/p>\n

The buyer has a mortgage of $540,000 and the condo is worth $500,000.<\/p>\n

Who\u2019s on the hook?<\/p>\n

The Canadian taxpayer<\/em>.<\/p>\n

How this is legal, I can\u2019t quite figure out.<\/p>\n

The Bank Act tells us:<\/p>\n

\n

Restriction on residential mortgages<\/strong><\/p>\n

418 (1)<\/strong> A bank shall not make a loan in Canada on the security of residential property in Canada for the purpose of purchasing, renovating, or improving that property, or refinance such a loan, if the amount of the loan, together with the amount then outstanding of any mortgage having an equal or prior claim against the property, would exceed 80 per cent of the value of the property at the time of the loan.<\/p>\n

Exception<\/strong><\/p>\n

(2)<\/strong> Subsection (1) does not apply in respect of<\/p>\n

(a)<\/strong> a loan made or guaranteed under the National Housing Act or any other Act of Parliament by or pursuant to which a different limit on the value of property on the security of which the bank may make a loan is established;<\/p>\n

(b)<\/strong> a loan if repayment of the amount of the loan that exceeds the maximum amount set out in subsection (1) is guaranteed or insured by a government agency or a private insurer approved by the Superintendant<\/p>\n<\/blockquote>\n

The Office of the Financial Superintendent is silent on this.<\/p>\n

Is OSFI okay with a blatant disregard for the Bank Act?<\/p>\n

Are they aware that lenders are being creative with the \u201cspirit\u201d of the Bank Act, all in the name of reducing potential losses on a loan?<\/p>\n

Because if you ask some people in the industry, they\u2019ll say:<\/p>\n

\u201cThe Bank Act says \u2018value\u2019 and that value can be established by an appraisal, but an appraisal is an opinion.\u201d<\/p>\n

So whose opinion are you using?\u00a0 And from when<\/em>?<\/p>\n

This calls into question the banks\u2019 stated loan to values, in that the \u201cvalue\u201d might not be accurate.<\/p>\n

Consider the scenario above where the condo was bought for $600,000 and appraised for $500,000, and let\u2019s assume the buyer makes a 20% down payment.\u00a0 The bank\u2019s LTV is 80%, right?\u00a0 That\u2019s 20% of $600,000.\u00a0 But the property is worth $500,000, so the LTV is actually 96%.<\/p>\n

In the end, I think that banks simply\u00a0need<\/em> to provide blanket appraisals, otherwise, the whole house comes crashing down.<\/p>\n

Connect the dots here:<\/p>\n

*Developers need to offer peace of mind to buyers to get them to purchase.<\/p>\n

*Banks want to lock-in future business.<\/p>\n

*Banks want to finance condo construction.<\/p>\n

*Developers don\u2019t want buyers defaulting upon closing.<\/p>\n

*Banks and<\/em> developers don\u2019t want developers stuck with unsold inventory, or worse \u2013 inventory coming back<\/em> to them.<\/p>\n

*Banks don\u2019t want developers finding themselves with a condominium corporation that can\u2019t close, leading to them breaching their loan covenant.<\/p>\n

The solution is simple: blanket appraisals.<\/p>\n

But note the world there: solution<\/em>.<\/p>\n

Because what I\u2019m left wondering is: what is this the solution to<\/em>?<\/p>\n