The Biden administration has laid out a sweeping plan that aims to increase oversight of the real-estate appraisal industry in an effort to reduce the frequency of racially-biased home valuations.
Last week, the White House unveiled a far-reaching, 21-step action plan that it described as “the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.” The plan was the culmination of an interagency task force that President Joe Biden announced back in June.
“‘Systemic bias in home valuations widens the racial wealth gap and deepens the longstanding financial inequities that divide our communities.’”
— Vice President Kamala Harris
“Systemic bias in home valuations widens the racial wealth gap and deepens the longstanding financial inequities that divide our communities,” Vice President Kamala Harris said in a speech highlighting the effort.
The action plan calls on government agencies, regulators and the appraisal industry to do the following:
Evaluate how existing laws including the Fair Housing Act apply to the appraisal sector.
Update policies for government loan programs, Fannie Mae
and Freddie Mac
to clarify what nondiscrimination requirements appraisers must follow for the mortgages these entities back.
Create guidance on what to do when an initial valuation is lower than expected, and improve consumer education regarding their rights in these situations.
Develop legislative proposals regarding creating a more modern governance structure for the appraisal industry.
Study the potential for racial bias in algorithms and technology-based valuation tools.
Update qualification criteria appraisers must meet in terms of education and experience and require anti-bias training.
Major trade groups support the plan
The report received the backing and support of major trade groups across the housing industry. Leslie Rouda Smith, President of the National Association of Realtors, noted that her organization met with the task force behind the plan “to propose solutions.”
“Historically, many groups have faced unfair home undervaluation,” Smith said. “Addressing those wrongs is key to providing financial stability to not only homeowners, but entire communities, and benefits the nation as a whole.”
The Appraisal Institute, an organization that represents real-estate appraisers, said it was prepared to work with the Biden administration and government agencies.
“The Action Plan calls for significant regulatory and oversight changes but does not outline specific plans. Transparency and accountability are important, but these goals should be balanced with maintaining industry independence and promoting entry into the profession,” Appraisal Institute President Jody Bishop said in a statement.
Similarly, Mortgage Bankers Association President and CEO Bob Broeksmit welcomed the report’s release, but cautioned that government agencies should “provide ample notice and comment opportunities for stakeholders during the implementation process.”
Appraisal bias hurts minority communities
The action plan cited recent research exploring the frequency and effects of racially-bias appraisals in laying out these objectives.
An examination of millions of property valuations released in December by the Federal House Finance Agency, the main regulator that oversees Fannie Mae and Freddie Mac, uncovered “thousands of potential race-related flags” written in free-form text boxes on appraisal forms, among the millions of appraisals submitted annually.
Examples the FHFA highlighted included an appraiser who noted that a nearby shopping plaza featured “storefronts supplying Jewish Households,” while another referred to an area with a growing immigrant population as “one spicy neighborhood.”
The FHFA report didn’t indicate whether appraisals that contained potentially biased language had lower appraisal values. However, a 2021 study from Freddie Mac found that 12.5% of homes in Black neighborhoods and 15.4% of homes in majority-Latino neighborhoods were valued below the contract price, compared with just 7.4% of homes in white neighborhoods.
And 2018 report from the Brookings Institution estimated that bias accounted for a loss of $48,000 per home in majority-Black neighborhoods, adding up to roughly $156 billion in cumulative lost value nationally.
Critics argue that policies should focus on socio-economic status rather than race
However, some economists argued that the action plan may not succeed in narrowing the racial wealth and homeownership gaps. A report from the American Enterprise Institute, a conservative think-tank based in Washington, D.C., argued that the findings in the Brookings and Freddie Mac studies were “not based on rigorous data analysis.”
The AEI report suggested that these other studies conflated racial bias with socio-economic status, arguing that factors such as income, buying power, credit scores and marriage rates could better explain the discrepancies. The task force’s report, though, did note that “much of the gap in rates of homeownership can be traced to socio-economic factors that differ on average between Black and white homeowners.”
“We ought to support opportunities for income and wealth growth among lower-income households,” the AEI report noted. “However, we should address the root cause for lower [socio-economic status], and not unsubstantiated claims of systemic bias and racism in the housing finance sector.”
Among the proposals the AEI suggested as alternatives included more attention to increasing housing supply and making it easier for low-income home buyers to qualify for loans.
The appraisal industry has come under scrutiny for years
Since the early days of his presidential campaign, Biden has maintained a focus on overhauling the way real-estate appraisals are conducted and how the industry operates to stem potential bias based on race and ethnicity. In 2020, he proposed creating “an objective national standard” for home valuations that would “make it harder for financial institutions to put pressure on appraisers to their benefit.”
In recent years, regulators haven’t only sought to rework the appraisal process to improve racial equity. Last year, the Federal Housing Finance Agency issued a “request for input” on the policies and practices surrounding home appraisals. The regulator is seeking input on a range of proposals, including relaxing key standards that Fannie and Freddie require lenders to abide by for the loans they back.
“‘It’s mostly white, wealthy people who get a waiver, and minority and the affordable housing sector don’t get waivers.’”
— Joan Trice, CEO of the Collateral Risk Network
“Modernizing the appraisal process has the potential to create a more streamlined and accurate collateral valuation process,” Mark Calabria, who was then the director of the FHFA, said at the time when announcing the request for information. “But if modernization is not properly adopted, it could have negative unintended consequences.”
One change the FHFA was investigating was to allow appraisal waivers for certain refinance loans, or hybrid appraisals where a trained individual conducts the home visit and then relays the necessary data to an appraiser working from an office who ascertains the property’s value. The idea was that the person conducting the inspection need not be an appraiser herself, which could address concerns that have been raised in the housing industry about appraiser shortages in many parts of the country.
But industry experts warned that these changes could have negative outcomes, including for people of color. “It’s mostly white, wealthy people who get a waiver, and minority and the affordable housing sector don’t get waivers,” Joan Trice, CEO of the Collateral Risk Network, an organizer of appraisers and risk manager, told MarketWatch in 2021. She argued that this could create a disparate impact, driving costs higher for minority mortgage applicants if appraisers need to make up for lost business.