Through all the transformative and disruptive changes that have occurred over the past two years, there is one common thread that has emerged. Regardless of the size or complexity of a system or process, it is time to look at whether the impact it has on people is equitable. All people. And the appraisal process is no exception.
After a summer filled with overwhelming demand and too little appraisal capacity, which increased loan costs and time to close, there is finally light appearing at the end of the tunnel. Recently, the Federal Housing Finance Agency (FHFA) announced that desktop appraisals — which allow valuations to be remotely performed by utilizing public records like tax appraisals, listings and other digitized property information — first implemented as a temporary measure at the start of the pandemic, will become permanent beginning in early 2022.
Additionally, as directed by the Biden administration, the U.S. Department of Housing and Urban Development last summer created the Property Appraisal Valuation Equity (PAVE) initiative and task force designed to fight valuation bias through consumer education and practitioner training, ensure that industry practices and government oversight promote valuation equity, prioritize high-quality data, and promote enforcement of anti-bias policies and legislation, including the Fair Housing Act.
These and other steps are sorely needed to bring the appraisal process in line with advances to digitize mortgages, utilizing technology to combat inconsistencies that continue to beleaguer the profession, and reduce closing slowdowns often caused by appraisal capacity issues. The movement to embrace appraisal modernization techniques also holds the promise of removing the potential for racial bias, better supporting efforts to remove valuation gaps that persist in minority neighborhoods.
Consider that, per recent research by Freddie Mac, 12.5% of the properties in Black neighborhoods receive appraisal values lower than the contract price versus 7.4% for those in white neighborhoods, resulting in a gap of 5.2%. The appraisal gap for properties in Latino neighborhoods can be even worse, going as high as 9.4%. Continued digitization of the appraisal process takes us a step closer to understanding the key drivers of these gaps and to ensure there is consistency of approach in every neighborhood, every time.
There is a path to progress that is emerging in the near term. Now is the time for the industry to work quickly and better coordinate efforts, particularly in the following areas:
- Enforcement and compliance. We need more science and less art. Data and compliance standards need to improve to more effectively identify valuation bias. The Appraisal Subcommittee must have greater direct oversight over individual states in order to ensure fair and consistent enforcement of appraisal behavior. And the Standards and Qualifications Boards also need greater diversity too, to eliminate blindspots and guarantee fairness for minorities in the profession.
- Advancing diversity and increasing opportunities in the appraiser workforce. The appraisal profession should resemble the communities in which they serve. Not only for the sake of building trust, but also to connect with a larger set of potential new appraisers. The greatest barrier to that today is the current supervisory model. Our industry must support and adopt solutions like the Practical Applications of Real Estate Appraisal (PAREA) and allow students to engage in simulated/virtual training programs in every state. Our industry must support appraisal diversity initiatives, recruit more minorities into the vocation, and increase incentives and opportunities for valuation professionals.
- Reconsideration of Value (ROV) process. Borrowers should always have the opportunity for appraisals to be reconsidered in an unbiased fashion. We all need to support an ROV process that provides recourse to customers who have legitimate concerns about the reliability and credibility of a valuation, including claims of bias or discrimination and lack of confidence in appraiser dependence. All lenders and their agents, not just appraisal management companies, should be obligated to follow this process.
- Policy, guidance and regulations. It is encouraging that the FHFA has decided to permanently allow desktop appraisals, and that is a good start. The agency would be well served to also adopt hybrid appraisals and inspection-only waiver policies as additional options to today’s GSE appraisal waivers. In addition, the industry must embrace modern appraisal practices that decrease subjective variance, increase independence from appraiser bias, and implement extra checks and balances via proven computer-driven models.
The modern appraisal movement is accelerating. And while there is no single product or change that will roll back the years of unequal policy and practice that have led us to this point in time, each action we take to increase consistency, grow and promote diversity, and embrace solutions that remove inequities take us a step closer to that possibility.
Kenon Chen is executive vice president at Clear Capital.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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