Depending on which experts you believe, the prevalence of racial and ethnic bias in the property appraisal business is either rampant or entirely overblown by politicians and the media.
The issue is an important one, particularly since regulatory agencies have made it clear that lenders, including credit unions, are responsible for the accuracy of appraisals. The agencies also have said that mortgage lenders are responsible for informing borrowers who are unhappy with appraisals that they may ask for a reconsideration of the estimate.
Reports of bias were serious enough for the Biden Administration to form a high-profile inter-agency task force in 2021 named the Interagency Task Force on Property Appraisal and Valuation Equity. The National Credit Union Administration and the Consumer Financial Protection Bureau are members. The NCUA is represented by Chairman Todd Harper; CFPB Director Rohit Chopra also is a member of the task force.
“Homeownership is often hindered by inequities within current home lending and appraisal processes, which research shows disproportionately impact people in communities of color,” the task force wrote in its initial action plan. “Though this broken system was created decades ago, perhaps the biggest drivers of the racial and ethnic wealth gap today are the racial and ethnic disparities in rates of homeownership and in the financial returns associated with owning a home.”
The appraisal industry disagreed. If there is a problem, the appraisal system is not responsible for it, according to Cindy Chance, CEO of the Appraisal Institute, an industry group. “Sweeping, sensationalized claims of ‘bias’ about our profession ignore appraisers’ core skills, ethical standards and professional disciplines,” she said in a lengthy statement last month. “What they need to know is that professional real estate appraisal has long been built on eliminating all kinds of irrational bias.”
Chance said that the public is hearing from the media about a “certain terrible kind of bias.” She continued, “Appraisers’ impartial analysis protects the public from our hard-wired, everyday biases that would undermine the healthy function of the real estate industry.”
She added that she is concerned about how these allegations of bias may play out: “Regulators, banks, and the public need to understand that undermining or replacing the appraiser is bad for people—a weakened appraisal profession promises devastating consequences for consumers and the economy.”
While the appraisal industry argues the problem is not them, two studies indicate that there is some connection between race and the appraised value of homes.
In October 2022, the National Community Reinvestment Coalition said it had used “mystery shoppers” for a study on appraisal bias in Baltimore. That study showed that appraisers assigned higher average monetary values when they believed a home was white-owned. White testers received valuations $7,000 higher on average than their Black partners who had the exact same home appraised. The racial discrepancies were as high as 9% and 13% in two cases, according to the group.
Then, in December 2022, the Brookings Institution used Federal Housing Finance Agency neighborhood-level data on home appraisals and other sources to report that homes in Black neighborhoods are valued roughly 21% to 23% below what their valuations would be in non-Black neighborhoods. After adjusting for characteristics of homes and neighborhoods, Brookings reported that appraisal transactions in majority-Black neighborhoods are 1.9 times more likely to be appraised under the contract price than homes in majority-white neighborhoods.
“Our overall conclusion is that at least 10% of homes are at risk of under-appraisal in majority-Black neighborhoods, and this has a modest but meaningful effect on overall valuations and final sales prices—limiting wealth accumulation for homeowners in majority-Black neighborhoods,” Brookings concluded. “Under-valuations also delay or cancel transactions, which reduces mutually beneficial market exchanges in Black communities.”
Members of the Biden Administration contend that part of the problem is how the appraisal industry is regulated. Each state or territory has a regulatory agency responsible for licensing and certifying appraisers, while a group known as the Appraisal Foundation develops generally accepted standards of practice for the industry nationwide.
The Appraisal Foundation’s work is monitored and reviewed by the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. Members of that subcommittee, which includes the CFPB and the NCUA, have raised serious questions about the foundation’s work.
“The Appraisal Foundation…appears reluctant to act,” CFPB officials said in February 2023, as they released a letter signed by members of the Interagency Task Force on Property Appraisal and Valuation Equity. “Its recalcitrance undermines efforts to rid the housing market of bias and discrimination and threatens the market’s fairness and competitiveness.”
To further complicate regulation and compliance, in December 2022, the Federal Housing Finance Agency’s Inspector General reported that the FHFA did not report evidence of appraisal bias to the appropriate state agencies that license appraisers and could sanction them.
“Filing complaints with state authorities and prompting investigations into potential noncompliance with [appraiser standards] is consistent with the purposes of the Fair Housing Act, the Administration’s policy set forth in executive order 13985, and with actions FHFA has taken to promote fair lending,” the IG reported. FHFA officials told the IG that they agreed that those reports should be filed with the appropriate state agencies.
The Biden Administration has taken several steps toward attempting to solve what it says are serious problems with the appraisal industry. Perhaps most importantly, in March 2023, the CFPB and the Justice Department filed a “Statement of Interest” in a case that was pending in a federal court in Maryland that made it clear that lenders are legally responsible for biased appraisals.
“A lender violates both the [Fair Housing Act and the Equal Credit Opportunity Act] if it relies on an appraisal that it knows or should know to be discriminatory,” the agencies said, explaining why they filed the statement. “The law is clear that mortgage lenders cannot take race, sex, or any other prohibited bases into account when evaluating the creditworthiness of an applicant.”
Just last week, the Department of Housing and Urban Development announced that lenders in its Single Family program must clearly explain how borrowers may request a reconsideration of a property appraisal. The information released to borrowers must include how long an appraisal reconsideration may take. For lenders, the new policy includes a requirement that loan underwriters be trained to identify appraisal problems, including allegations of racial or ethnic bias.
“We know that biased home appraisals not only disproportionately harm homeowners of color, but stunt economic opportunity for the communities we serve,” Department of Housing and Urban Development Acting Secretary Adrianne Todman said, as the new requirements were released. “Today, we are announcing a new step in our work to root out racial and ethnic bias in home valuations, which will give borrowers greater ability to have their home valuation reconsidered.”
Aside from human racial and ethnic bias issues, the interagency task force is grappling with the question of whether automated valuation models can be biased.
In June 2023, the NCUA, CFPB and banking regulators issued a proposed rule that would require mortgage originators and secondary market issuers to adopt measures to ensure that automated valuation models adhere to quality control standards. “While advances in AVM technology and data availability have the potential to contribute to lower costs and shorter turnaround times in the performance of property valuations, it is important that institutions using such tools take appropriate steps to ensure the credibility and integrity of the valuations produced by AVMs,” the agencies said, in issuing the rule.
That includes ensuring that the AVMs do not discriminate. “Existing nondiscrimination laws apply to appraisals and AVMs and institutions have a preexisting obligation to comply with all Federal laws, including Federal nondiscrimination laws,” the agencies said, in issuing the proposal.
The proposal was issued before the merger of the two national credit union trade groups, so the groups filed comments separately. In its comment, the Credit Union National Association said that credit unions, especially small ones, were concerned that the regulatory burden of requiring a non-discrimination quality control standard would preclude them from being able to use automated models.
For its part, the National Association of Federally-Insured Credit Unions said that AVM providers should have the burden of ensuring compliance with nondiscrimination laws. Stakeholders, and not credit unions, should establish a Standards Setting Organization to develop specifications for AVMs.
On the other hand, in a joint comment letter, the National Fair Housing Alliance and the National Consumer Law Center said it was extremely important that discrimination be included in any final rule. “AVMs run a high risk of perpetuating discrimination if they are not adequately examined and tested: there is no question that discriminatory mis-valuations are a historical and present phenomenon,” they wrote.
A final rule has not been released.
Last month, the FHFA said the interagency task force’s work is producing results. “Many stakeholder actions at the federal, state, and local levels have increased awareness of racial bias in home valuations, and there has been increased regulatory and supervisory focus on discriminatory appraisals,” FHFA officials said. FHFA statistics show that appraisal gaps between white, Black, and Hispanic borrowers have narrowed since the task force was formed. The FHFA cautioned, however, that further analysis is needed to determine whether that was a causal relationship.
