Five recommendations from Fannie Mae and ideas about how to put them in action
In 2020, Black homeowner Carlette Duffy submitted her home for appraisal. After two valuations came back much lower than expected, Duffy began to suspect her race was negatively impacting her home’s appraised value.
When she submitted her third appraisal request, Duffy took extraordinary measures to conceal her race, limiting interactions with the appraiser to email and even going so far as to having a white friend pose as her brother when the appraiser visited the home.
The first two appraisals for Duffy’s home came back at $125,000 and $110,000. On the appraisal for which she removed all ties to her racial identity, her home’s value was listed at $259,000.
This is just one example of the persistent racial bias present in the home appraisal and mortgage lending industries. Across the country today, Black and Latino families struggle to attain the American dream of homeownership. The racial homeownership gap is wider than it’s ever been with only 44% of Black people owning homes compared to 74% of their white counterparts.
The path to building wealth and financial stability in America is almost inextricably tied to stable housing and homeownership opportunities. It’s how most families get ahead and set up a comfortable life for future generations.
Unfortunately, systemic inequalities are making that path unreachable for millions of Black and Latino Americans. As it stands today, the median white family in America has eight times the wealth of Black families and five times that of Latino families.
According to the news outlet that originally reported Carlette Duffy’s story, “Racially based appraisal bias is a well-documented and pervasive issue that has long contributed to the widening wealth gap for Black families, and much of it has been driven by historical racialized appraisals that influence contemporary values and appraisers’ racialized assumptions about neighborhoods to drive appraisal method.”
Federal Task Force Identifies Bias in the Appraisal Industry
Last year, the White House announced its Action Plan to Advance Property Appraisal and Valuation Equity. The plan is intended to help address racial bias in the appraisal industry. It represents an interagency initiative charged with evaluating the causes, extent and outcomes of appraisal bias and submitting recommendations to help ensure all homeowners receive fair and accurate home valuations.
According to the PAVE task force, “An appraiser’s opinion of value is very dependent on that appraiser’s selection of comparable properties and the adjustments and weighting the appraiser applies to those selections. This decision has subjective elements that depend on the expertise of the appraiser and the appraiser’s familiarity with the neighborhood, resulting in a natural imprecision of the appraiser’s estimate of the home’s value.”
The task force goes on to say, “On average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents. Statistical analyses show that accounting for neighborhood and property characteristics and amenities—such as the age of the property or its proximity to public transportation—does not explain the entire disparity. Recent research has identified appraisals as one of the drivers of the gap.”
Recommendations for Industry Leaders to Help Eliminate Racial Bias in Home Valuations
Following the introduction of the PAVE action plan, Fannie Mae released new research to help industry leaders understand valuation differences across demographic groups. They found:
- Black borrowers refinancing their home received a slightly lower appraisal value on average relative to automated valuation models;
- Homes owned by white borrowers were more frequently overvalued than homes owned by Black borrowers;
- The frequency of “undervaluation” did not have a notable racial pattern; and
- Six states accounted for almost 50% of the overvalued homes of white owners in majority-Black neighborhoods.
To help address these issues, Fannie Mae called on industry leaders to adopt the following recommendations:
- Increase the use of such alternative-scope property valuation approaches as hybrid and desktop appraisals. Desktop and hybrid appraisals are conducted remotely by a licensed appraiser using market research, tax records, MLS records, and other resources to guide their valuation decision. Hybrid appraisals are conducted in the same way, but the appraiser can also use third-party information to help determine a home’s value.
- Build on existing safeguards to detect valuation errors. Lenders using automated underwriting platforms should take care to ensure they are tightly integrated with systems that can identify issues with asset valuations.
- Continue to modernize the appraisal process for home loans. Mortgage lenders should always be thinking about how to improve their appraisal processes through leveraging data, technology, and process design to drive more factual, objective, and accurate results.
- Foster diversity in the appraiser workforce. The Appraiser Diversity Initiative is an industry-wide program sponsored by Fannie Mae, Freddie Mac, and the National Urban League that aims to bring more people of color into the appraisal industry. Visit their website to learn more.
- Enhance the tools appraisers use to validate their opinions. Since many inaccurate valuations are directly tied to issues with comps and adjustments, it’s important to arm individual appraisers with the tools needed to properly validate their assumptions about the value of homes in the area.
Communities of color have already lost billions of dollars in accumulated wealth solely through the appraisal process. As mortgage industry leaders, I believe we all need to be responsible to ensure we are part of important industry discussions regarding appraisal bias and inequity and discrimination practices.
As EVP/lending and insurance solutions for CUES Supplier member SWBC, San Antonio, Texas, Tyreo Harrison leads teams of lending and insurance professionals that are dedicated to delivering value-added programs, services and technology tailored to address the needs of lenders, loan servicers, portfolio managers, mortgage brokers, insurance agents and insurance brokers.