The Biden administration is seeking to to tackle the decades-old problem of home appraisals undervaluing properties in Black communities, but the initial proposals are seen as incremental steps needing further action in the future.
A HUD-led task force that includes bank and housing finance regulators will convene later this month to begin a thorough review of the home appraisal process and recommend regulatory and legislative steps to reduce racial disparities. Some of the early ideas discussed include increased use of automated valuations to reduce opportunities for human bias and mandatory data reporting that could be used to root out bad actors in the appraisal industry.
The problems in home valuation, and its effect on wealth creation in Black and other communities of color, stem from entrenched redlining, regulatory policies, and an appraisal industry that relies too heavily on comparable properties when determining home values, said Junia Howell, a sociologist and co-author of a 2020 study of racial disparities in home appraisals.
The administration and Congress will need to think radically to address all of those issues, she said.
“What has come out so far, both on the Hill side and the administration side are really very, very small baby steps to a bigger problem,” Howell said.
President Joe Biden announced the creation of an interagency task force to address “inequities” in home appraisals on June 1 at a ceremony commemorating the 100th anniversary of the Tulsa race massacre.
The value of homes in white neighborhoods rose an average of $225,000 in real dollars from 1980 through 2015, according to a 2020 study co-authored by Howell and published in the journal Social Problems.
Homes in communities of color saw their value rise by only an average of $31,000 in that same period, it said.
Those communities also haven’t fully recovered from the 2008 financial crisis, according to Nikitra Bailey, an executive vice president at the Center for Responsible Lending. Overvaluations during the crisis helped contribute to the subprime mortgage bubble and cost Black and Latino communities around $1 trillion, she said.
“We acknowledge the responsibility to improve equitable access to homeownership for all,” Rodman Schley, the president of the Appraisal Institute, an industry group, said in a statement.
Schley said the industry is exploring “what combination of solutions should be considered to address the complex and deep-rooted nature of housing inequities.”
Housing and Urban Development Secretary Marcia Fudge will convene 11 agencies, including the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac, by the end of June, a senior HUD official told Bloomberg Law. The Consumer Financial Protection Bureau, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and other financial regulators will also be involved.
The panel will also seek information from civil rights and consumer groups, the appraisal and real estate industries, and state regulators, which oversee most appraisers.
“A lot of the interventions and the outcomes that I think will be recommended I think will require an incredible conversation and coordination with state and local leaders,” Alanna McCargo, a senior adviser to Fudge, said at a June 15 appraisal event hosted by the CFPB.
Federal regulators are already starting their work.
The FHFA in December issued an information request on improving the appraisal process. The Fed, FDIC, OCC, the National Credit Union Administration and CFPB are exploring rule on increasing the use of automated home valuation methods (AVMs) that could reduce instances of human bias in the appraisal process.
“We really need to take more aggressive steps to be removing subjectivity from the process,” Lisa Rice, the president and CEO of the National Fair Housing Coalition, said at the CFPB event.
Automated tools can serve as a balance to any conscious or subconscious bias in appraisals by creating standardized measurements to evaluate a home, including evaluating statistics like the number of bedrooms and bathrooms.
“That kind of reliance on good information in an automated fashion is already happening, the question is how you optimize it,” said Meg Burns, the executive vice president of the Housing Policy Council, an industry group that includes mortgage lenders, insurers and real-estate settlement providers.
Automated appraisal methods have their own potential flaws. The 2010 Dodd-Frank Act called for financial regulators to work on quality control for so-called AVMs.
AVM designers and regulators will have to ensure that biases aren’t baked into the data inputs and formulas used in the tool, said Patricia McCoy, a professor at Boston College Law School and a former top CFPB mortgage official.
One potential solution would be for regulators to allow AVMs and human appraisals to back each other up, McCoy said. Buyers and sellers should have the opportunity to make appeals if there’s significant differences between the two valuations, she added.
The Home Mortgage Disclosure Act requires banks and other mortgage lenders to report and publicly disclose detailed information about home loans. Some housing experts have said that a similar database for home appraisals would be useful for regulators and fair housing groups to spot potential discrimination.
Fannie and Freddie’s regulator, the FHFA, could create an appraisal database given the data it already has, according to Ed Pinto, the director of the American Enterprise Institute’s Housing Center.
Having that data could allow regulators and others to weed out appraisers who consistently provide biased valuations, he said.
“Until you know that, how can you solve it?” Pinto said in an interview with Bloomberg Law.
The HUD-led task force could attempt bolder steps, including finding an alternative to the comparison-based appraisal process. Such a move would force appraisers to measure a home’s value independent of its neighborhood.
The industry says that approach isn’t feasible. Comparison-based appraisals are the standard for any item that’s up for auction, from Ming vases to fine art, Burns said.
In housing, “the neighborhood features, the amenities, the demand do affect the ultimate opinion of value,” she said.
Even if the Biden team doesn’t push for major structural changes to the appraisal process, it should begin with immediate steps that would ultimately lead to more wealth creation in Black and other minority neighborhoods, McCoy said.
“The effect on today’s Black homebuyers will be smaller, but the effect on their children will be larger,” she said.