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The real estate appraisal industry could be in for some significant changes as the Biden administration looks to make good on a campaign pledge to root out racial discrimination in the housing industry.
Vice President Kamala Harris, Secretary of Housing and Urban Development Marcia Fudge and presidential advisor Susan Rice announced a 21-point plan at the end of last month that rallies the many federal banking and housing regulators around the goal of eliminating bias in home appraisals.
From new fair housing guidance to enabling more academic research into bias and trying to change regulations seen as preventing people of color from joining the industry, the PAVE report, as the plan is known, largely relies on administrative actions within the current fair housing legal framework.
“I think this is in many cases long overdue. I think the appraisal industry has been ripe for reform for a while,” said Tom Callahan, executive director of the Massachusetts Community and Banking Council and a former board member of the Appraisal Institute, the body that regulates appraisers.
Bias Evident, But Hard to Pin Down
More than half a century after the Civil Rights Movement, it’s hard to deny that racial bias still exists in home appraisals.
Academics like the Brookings Institution’s Andre Perry identified a statistical pattern of bias in appraisal values for properties in Black neighborhoods as early as 2018. And as news outlets across the country turned their attention to the racial wealth gap in 2020, they turned up stories where homeowners of color received below-market appraisals when their homes contained items, like family photos, that indicated their race and much higher valuations when they didn’t.
In response, Freddie Mac dove deep into home appraisal data in 2021 and concluded “substantial” gaps exist between appraisals for homes in majority-white and majority-minority Census tracts. Further research by the mortgage-buyer’s analysts ruled out variations in comparable sales, and concluded appraisals were more likely to come in under contract in majority-minority Census tracts.
A December study of appraisal reports by the Federal Housing Finance Agency also found thousands of cases of potential racial bias in the language, whether accidental or intentional, that some appraisers used to describe properties in the free-form sectins of appraisal reports.
“Because their homes are undervalued – because, understand, there’s a real consequence – Black and Latino people often have to pay more for their mortgage, receive less when they sell the home and are less able to access home equity lines of credit,” Harris said in a speech introducing the plan March 23. “Systemic bias in home valuations widens the racial wealth gap – widens the racial wealth gap and deepens the longstanding financial inequities that divide our communities.”
The appraisal industry has responded to these reports; the Massachusetts Board of Real Estate Appraisers launched efforts to revamp appraiser training nationwide over the last several years to root out potential sources of bias.
“As an organization MBREA takes any accusation of bias very seriously,” said Steve Sousa, executive director of the MBREA.
But while Sousa praised the PAVE report’s comprehensiveness and proposed solutions, he sounded a note of concern: Research is still lacking on a key area that could shine light on why individual appraisers’ decisions are creating statistical patterns of racial bias. Few appraisers, he said, likely think they’re biased.
“To the best of our knowledge, no one has had an opportunity to do an independent analysis of a before-and-after of an appraisal,” he said. “That would give us the facts: ‘Yes, this appraisal was wrong or no, this was not wrong.’ That would create training opportunities to minimize this in the future.”
Changes to Oversight, Appraisal Methods
Of the PAVE report’s many recommendations, one of the biggest proposed shifts may be a push by the FHFA to change the forms appraisers use to evaluate a residential property.
Under the plan, the FHFA would update the uniform residential appraisal report and the uniform appraisal dataset to “capture more objective data points and lessen reliance on free-form commentary,” the PAVE report says. Fannie Mae and Freddie Mac began an effort to redesign both in 2019.
“It’s really going to be a whole new approach to reporting, in terms of an appraiser. As Turbotax is to tax filings, this is going to be to appraising. It’s going to be a much more intuitive process and it’s going to reduce the need for these free-form commentaries,” Sousa said.
The PAVE report also says the 12 federal agencies that made up the report task force also plan to improve cooperation when investigating allegations of appraisal bias. Automatic valuation models, used by companies like Zillow, may also come under scrutiny.
James Sanna
And appraisers won’t be the sole focus of stepped-up enforcement efforts. The National Credit Union Administration, Office of the Comptroller of the Currency, the Federal Reserve and the Consumer Financial Protection Bureau all plan to add tests for appraisal bias to their oversight of mortgage lenders. As part of a set of pledges to educate and empower consumers potentially affected by the problem, HUD will provide funds for researchers to conduct testing for appraisal bias in different real estate markets. Similar testing is already done to search for bias in real estate sales and rentals.
“The call for testing will be important. I was glad to see HUD putting what looks like its money where its mouth is,” MCBC’s Callahan said.
But the most powerful changes to root out appraisal bias may have to wait, Callahan and Sousa both said. Because state laws play a large role in governing the appraisal industry, much work lies ahead to reform appraiser training requirements and make it easier for more diverse workers to join the overwhelmingly white field.
