By Kyle Campbell, AMERICAN BANKER – January 23, 2023
As the Biden administration's effort to root out bias among home appraisers marches on, those in the field worry the push could undermine their independence.
Since the White House launched the Property Appraisal and Valuation Equity, or PAVE, Task Force in June 2021, there have been two congressional hearings on the matter and draft legislation from Rep. Maxine Waters, D-Calif., the former chair of the House Financial Services Committee, that would impose federal oversight over the appraisal profession.
Democrats no longer control the House, so the odds of legislative changes to appraisal regulation are slim, but regulators remain fixated on the issue.
On Tuesday morning, Consumer Financial Protection Bureau Director Rohit Chopra, Housing and Urban Development Secretary Marcia Fudge and Federal Home Finance Agency Director Sandra Thompson are set to participate in a hearing on the topic of racial bias in home valuation. The hearing will be hosted by the Federal Financial Institutions Examination Council's appraisal subcommittee, the agency tasked with overseeing state regulation of appraisers and appraisal management companies.
Already some of the most significant changes on the matter have come from those agencies. Last October, the FHFA launched a public database of aggregated and anonymized appraisal data that shows, among other things, trends in "undervaluation" — when homes are appraised below their contractual price. Earlier this month, HUD proposed a policy change that would make it easier for homeowners to challenge appraisals they believe were skewed by racial bias.
More reforms are expected as various agencies work through findings from the PAVE Task Force and other efforts, such as Tuesday's hearing.
But, as Washington once again shines a spotlight on appraisal bias, working appraisers are concerned the government's efforts will erode some of the safeguards implemented by the Dodd-Frank Act of 2010 and, ultimately, end up pressuring appraisers to err on the side of higher valuations. Such a trend could put both banks and other lenders as well as borrowers in harm's way.
Mary Cummins, a Los Angeles-based real estate appraiser, said the FHFA's focus on undervaluation is creating pressure for appraisers to sync their findings with contract pricing. However, she said, this type of outside influence is illegal and something Congress sought to eliminate with Dodd-Frank, which bars lenders from discussing valuations with appraisers.
"It shocks the conscience that the government is now the one pressuring, influencing the appraiser to come in at or above contract value with some borrowers," Cummins said, adding that the focus on getting higher valuations in lower-income areas could lead to poorer borrowers being saddled with underwater mortgages in down markets.
"You would be doing a cruel disservice to these people to come in high. They would end up upside down with a huge mortgage payment they may not be able to afford," she said. "Did the government learn nothing from the Great Recession?"
The issue of bias in appraisal rose to national prominence during the pandemic, as ultralow interest rates and a red-hot housing market led to a surge in sales and refinancings. During that boom, some Black homeowners found their properties were appraised for less than similar ones in majority-white neighborhoods.
In several high-profile instances, Black homeowners received more favorable appraisals after having white friends or family members stand in for them during home inspections and by removing all traces that a home has Black inhabitants. In some cases, the price disparities were in the hundreds of thousands of dollars.
While lawmakers, agency heads and advocates have beat the drum for reforms in the valuation process in the wake of those revelations, working appraisers throughout the country have been perplexed by the idea that racial bias is so widespread in their field that it warrants regulatory action.
"This is a hard profession to get into, and I don't think most appraisers would do anything crazy to jeopardize their livelihoods," Debra Herbert, a residential appraiser in Metro New Orleans, said, noting that appraising below contract value often leads to loans falling through. "If you are tanking deals left and right for a lender, they're going to stop using you. There are plenty of other appraisers they can call, especially if you are intentionally trying to keep sales from going through."
Herbert said there could be some bad actors in the profession who deliberately try to undervalue properties to harm borrowers of color, but like many appraisers, she believes doing so would require a substantial amount of additional work and still be easily detected.
The appraisal process consists of two primary components: an in-home inspection and a price analysis using comparable properties, also known as comps. While the in-home component of the appraisal identifies features of a home that could influence value incrementally — such as interior renovations or the presence of new appliances — the bulk of the valuation is determined by the property's location and size, with comps used as benchmarks.
Some advocacy groups have indicated that comp selection could be influenced by biases, if appraisers were to pick comps in different neighborhoods in accordance to the subject property owner's race.
But rank-and-file appraisers say the opportunities for bias to come into play are few and far between when identifying like properties. Most tend to look for homes for sale in the immediate vicinity, only crossing neighborhood lines for homes that are significantly different from their nearest neighbors and giving lower weighting to farther away properties. In instances where comps are picked in other neighborhoods, the racial makeup of those neighborhoods are not overtly considered, six appraisers from various states told American Banker this week.
"To be biased, you'd have to intentionally go out of your way, because everything I've been taught and have done for the last almost 20 years is what the guidelines told us to do as far as distance of comps," Nicole Curcio, an appraiser in Rochester, New York said, adding that for urban properties, appraisers keep their search radiuses to one mile or less. "I can guarantee if I put a comp in a report that's sold on the secondary market and it's 1.01 miles away from the subject property, that's going to get a red flag and then it's going to come back to me with all kinds of questions."
Other common practices further narrow the window for bias. Appraisers typically only see homeowners when inspecting for refinancing loans or home equity lines of credit. In instances of sale, properties are usually vacant. Also, many appraisers select their comps — which must be photographed as part of an appraisal report — before going to a property for a walk-through, to avoid making multiple trips.
More appraisers are inclined to believe that wildly errant valuation reports are the result of negligence or incompetence, rather than racial prejudice.
Still, regardless why a home is appraised well below market value, undervaluing a property can have significant impact on homeowners looking to tap into the equity in their homes, Julia R. Gordon, HUD's federal housing commissioner, said, adding that racial bias is just one of several reasons why homeowners can contest a valuation under FHA's latest policy proposal.
"We noticed this gap, where it wasn't really clear, if you were a borrower, how you should go ahead and speak up, how to raise your hand," Gordon said. "What this new policy does is it provides a process for the borrower to raise their hand to the lender. Then the lender has to decide what to do about it."
However, some see this initiative putting more pressure on appraisers to inflate values. Jeremy Bagott, a California-based appraiser, said since many appraisers do not know the race of the parties involved, they will be inclined to appraise higher to avoid risking a complaint.
"Appraisers need a safe space to provide honest value opinions if America's $11 trillion mortgage market is to function like a true market. Imagine if stock analysts were subject to the same tactics. You would never again trust the valuation of any stock," Bagott said. "That safe space is disappearing for real estate appraisers. They are being arm-twisted, through regulatory means, to play ball. That's a recipe for a market bubble."
Tuesday's hearing begins at 10 a.m. at the CFPB's headquarters in Washington. The various participating agency heads will sit on a panel. Witnesses include Dr. Junia Howell, a visiting assistant professor of sociology at the University of Illinois-Chicago, Paul Austin and Tenisha Tate-Austin, homeowners from Marin, Calif.; Michael Fratantoni, senior vice president of research and technology and chief economist at the Mortgage Bankers Association; and Craig Steinley, president of the Appraisal Institute.
The event is the first public hearing hosted by the appraisal subcommittee on racial bias.
"The Appraisal Subcommittee is pleased to have this opportunity to approach and assess the structural issue of bias in the appraisal industry in an objective and constructive manner," Appraisal Subcommittee's Director Jim Park said in a written statement. "The ASC's role in the industry positions us well to lead this conversation and to continue to move work on this issue forward."