Biden administration unveils plan to curb racial bias in home appraisals

Government seeks to empower consumers to challenge low valuations while lifting obstacles to minorities becoming appraisers.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | March 26, 2022

Are racial minorities suffering financial losses because their home appraisals are tainted by bias?

The Biden administration thinks so.

And on Wednesday, March 23, an inter-agency task force co-chaired by U.S. Housing and Urban Development Secretary Marcia Fudge unveiled an action plan designed to transform the appraisal industry and root out hidden bias that can affect a minority homeowner’s mortgage rates, equity and income from a sale.

Called the Property Appraisal and Valuation Equity Action Plan, or PAVE, its goal is to make the appraisal industry more accountable, empower consumers with information and assistance, prevent algorithmic bias in automated appraisals and recruit more minorities to an industry the government says is 97% White.

Actions include steps federal agencies can take under their existing authority to enhance oversight and accountability of the appraisal industry. In addition, the government will educate homeowners and buyers on what they can do when they get an appraisal that’s lower than expected.

No doubt there is no place for bias. Bias in home valuations limits the ability of Black and Brown families to enjoy financial returns associated with homeownership, contributing to the already sprawling racial wealth gap, according to a White House fact sheet.

Today, the median White family holds eight times the wealth of the typical Black family and five times the wealth of the typical Latino family, the fact sheet said.

Furthermore, new research shows low appraisals can be widespread in communities of color. Freddie Mac found appraisals for home purchases in majority-Black and majority-Latino neighborhoods were roughly twice as likely to be below a home’s contract price than in predominantly White neighborhoods.

The appraisal industry, the fact sheet said, “has long operated in a relatively closed and self-regulated framework.” Legislation is needed to make the industry more accountable.

Steps also need to be taken to remove “unnecessary education and experience requirements” to allow more minorities to become appraisers.

“The spirit in which it was developed was a step in the right direction,” said Tony Thompson, founder and CEO of the National Association of Minority Mortgage Bankers of America. “Close the homeownership gap while increasing the equity and wealth gap in communities of color.”

Taking steps to address the nation’s long history of housing discrimination is laudatory.

It struck me initially, however, that this process could backfire if it affects the independence of individual appraisers. Banks and lenders need accurate appraisals to ensure they can recover the cash they’re lending out if something goes wrong with the loan.

The importance of appraiser independence was enshrined in the 2010 Dodd-Frank Act, which contained language ending the abuse appraisers suffered during the housing bubble of the mid-2000’s. Back then, appraisers often were pressured to hit a property value number as a condition for getting work.

Maybe I’m overreacting. But every appraiser I spoke to about this is skeptical.

The Appraisal Institute released a statement noting that “this is a complex issue.”

“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.

Appraisals have been a hot-button issue for the past decade – among minorities and non-minorities alike. Hands down, the biggest complaint I receive as a mortgage loan originator is about getting low-balled on an appraisal. Low appraisals – which are common when home prices rise so fast – can kill a sale.

The rebuttal process never worked. In my experience we might get a reconsideration of value in perhaps 5-10% of all the requests we’ve submitted. Even then, the updated values never came close to where it should have been.

There’s already plenty of ways to root out bad appraisers. Fannie Mae and Freddie Mac get a copy of every appraisal. They possess a Fort Knox full of historic and current property data, values and trendlines for 65% of the roughly 111 million U.S. residential properties.

One appraisal industry executive told me Fannie and Freddie have about 1,000 appraisers on an exclusion list — their version of a do not fly list. About 5% of appraisers receive dunning letters from Fan and Fred for unacceptable work.

Appraisal bias can be detected now through trend lines and comparisons.

The U.S. Veterans Affairs Department and the Federal Housing Administration remove bad appraisers from their approved lists.

They may not have the level of intelligence sophistication Fannie and Freddie have, but there’s no reason this task force can’t make Fan and Fred share their lists.

Since appraisal bias violates the Fair Housing Act and the Equal Credit Opportunity Act, state license providers also might also be able to discipline biased appraisers.

Freddie Mac rate news: The 30-year fixed rate averaged 4.42%, 26 basis points higher than last week. The 15-year fixed rate averaged 3.63%, 24 basis points higher than last week.

The Mortgage Bankers Association reported an 8.1% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $461 less than this week’s payment of $3,249.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 4%, a 15-year conventional at 3.75%, a 30-year conventional at 4.5%, a 15-year conventional high-balance ($647,201 to $970,800) at 4.375%, a 30-year conventional high-balance at 4.875% and a 30-year fixed purchase jumbo at 4 %.

Eye catcher loan of the week: A 30-year purchase, adjustable jumbo mortgage, locked for the first 10-years with an interest-only payment at 4.125%, without points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.