Rising home prices and tighter mortgage regulations are likely to mean more people overstating their income on loan applications.
A study of CMHC-backed mortgages and CSA data by Kiana Basiri and Babak Mahmoudi of the corporation’s Housing Finance Division, was presented to the American Real Estate and Urban Economics Association conference in Washington DC last week.
Analyzing data from 2004-2014, the duo found that there was no significant increase in ‘possible income misstatement’ (PIM) during the ten-year period. But where prices increased the most, so did overstated income.
They concluded that a 1% rise in house prices saw PIM rise 0.74%; suggesting in a hot housing market, borrowers “have more incentive” to overstate their income.
This, the study says, is likely to mean that a negative income shock would result in increased probability of mortgage defaults.
Credit scores are less effective
The paper warns that mortgage lenders’ traditional reliance on credit scores means that overstatement of income would not be revealed at the application stage.
It calls for better income verification processes including checking income statements against CSA data; and says that lenders and brokers should consider income statements with caution, especially in higher-priced markets.
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