Appraisals and ValuationsBlack HomeownershipOpinionReal Estate

Is the appraisal process color-blind?

Leaders should seek reasonable and effective solutions to eliminate racial discrimination from the home-buying process

Recently, at an event marking the 100th anniversary of the Tulsa Race Massacre, President Biden announced the launch of a new interagency task force to root out what it calls inequity in the appraisal industry.

As a candidate, Biden’s campaign said he would “establish a national standard for housing appraisals” to ensure that appraisers are adequately trained, understand the neighborhoods in which they work and “do not hold implicit biases” that influence their work.

As most know, there have been multiple reports of race-based appraisal bias among certain appraisers in varied locations across the nation. Stories have appeared in the Washington Post, the New York Times, and across various local news outlets all sharing real life events highlighting two things.

First, they show homes where at least one African American person lives where the appraiser came back with a value that seemed unusually low for the home and the market. Then after another appraisal was completed — often after elevating the concern to the lender and reportedly pressing for a second appraisal to be done even if at the borrowers cost — the value remarkably comes back at or above value.

The dramatic change in value from two appraisals seems unusual. But more concerning is how it happens and what the homeowners do to get a better, and more accurate, value. In all of these cases the home get’s “whitewashed” before the second appraisal is completed. Whitewashing can be done in various forms. In some cases, the photos and decorations in the home that reflect a Black family member living there are removed and replaced with white people and decorations. In other cases, the African American family member(s) simply leave the home and a white friend meets the appraiser at the door claiming to be the owner.

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Some may simply want to say that these are insignificant in their frequency and that appraisers may come up with varying values from another appraiser simply due to time between the two appraisals, ‘comp’ selection and experience with the area. But in some cases, the reporting is clearly disturbing.

The Washington Post story from January of this year highlights a mixed race couple who live in Denver in the Park Hill area where precisely this happened. The home where the Mitchells live had values that typically range between $450k – $550k, and the couple estimated that their value might come in around $500k. The first appraisal came back at $405k.

In studying the appraisal, they found that all of the ‘comps’ came from the north side of Martin Luther King Boulevard where properties tend to sell for lower values, so the Mitchells scheduled a second appraisal, but this time only Gwen, who is white, stayed home. The next appraisal came back at $550k, a swing of $145k. The stories go on and on — from Connecticut, Florida, California, and beyond and they are all far too similar.

The National Association of Realtors has been very outspoken on racism and bias as in this statement for one of the stories on the subject. “We know discrimination is in nearly every aspect of the home buying process,” said Jessica Lautz, National Association of Realtors vice president of demographics and behavioral insights. “We need to be addressing it as an industry”.

In an investigatory project by the Canadian Broadcasting Company, they video recorded six different appraisers all appraising the exact same home. The only difference was that three different individuals met the appraisers, one of whom was white. Additionally, they swapped out artwork and photos to reflect the ethnicity of the supposed owner. The results were consistent. The appraisals completed for the home when the Black actor greeted the appraiser at worst came in several hundred thousand dollars below the others.

As part of this story, I contacted the Appraisal Institute and received a response from Institute President, Rodman Schley, MAI, SRA, which stated, “When we see even one story of a consumer who feels they were treated differently because of their race, it’s very concerning because that goes against everything we stand for. Appraisers take a lot of pride in being an objective source of real estate value information.” The statement went on to say that they have a project team looking into reports about “diversity, equity, and inclusion in appraisal.” The statement makes clear that they want to better understand the circumstances of any variation in values.

For decades there have been efforts to reduce or eliminate any bias or influence in appraising. The Home Valuation Code of Conduct (HVCC) was established in 2008 and agreed to between the GSEs and FHFA. The rule, adopted only after a federal suit was filed against the GSEs by the New York Attorney General, does many things but in it’s most simplistic form it sets appraiser independence safeguards so that there is no unnecessary influence in determining final value in an appraisal.

The HVCC goes part of the way, but certainly doesn’t go far enough when racial bias exists.

Despite objections from some in industry, HVCC was a necessary change in order to avoid the influence that loan officers and Realtors all used to practice prior to the rule. As with any rule or regulation, there are challenges and with this there are some such as concerns about AMCs or panels that relate to appraiser selection and bureaucracy. The outcome of HVCC is often used to argue about appraisers, who are unfamiliar with the property location, coming from long distance to do the appraisal and the mistakes that are supposedly made.

In reality, the industry needs to recognize that much of the concern comes from an aging of the workforce and a shortage of licensed appraisers, but we can debate all of this another time.

I leave all of this with a few conclusions, the first being that racial bias exists in every part of society. While not all discriminate, some do and will. We see this in employment, from service providers, education, health care and more. The point being, of course there is bias in the real estate and mortgage finance arena — there has to be as no profession is insulated from this part of the American struggle.

The second is that the intent of the leadership of this massive real estate and mortgage finance industry is clear. NAR, the MBA, and the Appraisal Institute all have efforts focused on removing bias in the industry and promoting diversity. This concern about racial bias is real, it definitely exists as identified by far too many scenarios, but it is not necessarily in the majority of transactions.

In the White House fact sheet on this issue, released early June 2021, the administration states that it will, “aggressively combat housing discrimination.” Given the focus here and the clear communication from the administration, what should be done?

First: Every lender should have an escalation process for second-level review for any appraisal to a minority borrower that comes in below value or estimated value. If warranted, lenders should proactively support a second appraisal.

Second: The industry needs to adopt more color-blind processes to appraise a home. One possible solution is to separate the individual who measures the home and takes photos from the actual person doing the write up and assessment of value so as to reduce the impact of on-site, location-based racial bias.

Third: The efforts to automate property valuation should be enhanced. There are new products which can help, and while the GSEs are being controlled on experimental and new products, pilots, and technologies, this is one area that should be approved for significant focus.

The fact is that the mere implication for an African American borrower that they might need to somehow ‘whitewash’ their home before letting an appraiser visit should concern everyone in the industry. I understand that there will be pushback to this from some, and if this was simply an isolated incident I could understand that resistance. But there are simply too many instances in these stories and so many others that I did not include.

We, the collective “We,” need to lead the way as an industry to affirmatively act to root out any and all acts of discrimination and not be silent. When the administration calls the issue out and sets a task force to focus on it, leaders should lean in and encourage efforts to participate in the process to seek reasonable and effective solutions so that any discrimination can be eliminated from the home mortgage process.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Dave Stevens at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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