White House Releases Plan to Combat Appraisal Bias

On March 23, the Biden Administration’s Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) released a five-step action plan aimed at “dismantling racial bias in the home lending and appraisal process and promoting generational wealth creation through homeownership.” 

According to a press release from the U.S. Department of Housing and Urban Development (HUD), when enacted, the action plan will represent “the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.” 

HUD said the interagency task force “engaged more than 150 stakeholder groups including appraisers, appraisal management companies, lenders, civil rights and advocacy groups, academic institutions, philanthropy organizations, and individuals who have experienced instances of appraisal bias to listen and learn diverse perspectives on what is working and how the Federal government can work to embed equity in the home valuation process.” 

The National Association of REALTORS® (NAR) played a role in the formation of the plan, “including meeting with the PAVE Task Force to propose solutions on how the Biden administration, REALTORS®, and the broader appraisal industry could work together to address concerns and improve public trust in the appraisal process.” 

In a statement following the release of the report, NAR President Leslie Rouda Smith, said “Historically, many groups have faced unfair home undervaluation. Addressing those wrongs is key to providing financial stability to not only homeowners, but entire communities, and benefits the nation as a whole.”

A history of inequality

According to the task force’s executive summary, “On average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents.” The summary goes on to say that “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,” and explains that “Recent research has identified appraisals as one of the drivers of the gap.” 

In 2021, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, conducted extensive research on this topic and released a report titled Racial and Ethnic Valuation Gaps in Home Purchase Appraisals. Based on analysis of more than 12 million appraisals (from Jan. 1, 2015, to Dec. 31, 2021), Freddie Mac researchers found “appraisal gaps seem pervasive” in lowering home value determinations in Black and Latino neighborhoods.   

For example, the report revealed that 12.5 percent of the appraisals in majority-Black neighborhoods and 15.4 percent of appraisals in majority-Latino neighborhoods came in below the contract price of the houses they assessed, compared to 7.4 percent in majority-White neighborhoods. According to Freddie Mac, “as the concentration of Black or Latino in a census tract increases, the appraisal valuation gap increases.” 

The PAVE Task Force says this pattern of undervaluation in communities of color “can impact an entire neighborhood,” explaining that “Each instance of a lower purchase price becomes a candidate for the next appraiser to choose as a comparable sale for the next appraisal in the community, carrying the impact of the lower value forward.” 

PAVE says over time, “even a slight imbalance of undervaluation can have a significant effect on the property values in a community, and hence on the accumulated wealth of homeowners in that community.” 

A plan to move forward 

In developing the action plan, the task force focused on “identifying concrete actions that agencies have committed to take to eliminate bias and advance equity in home appraisals.” Those commitments include strengthening guardrails against unlawful discrimination in all stages of residential valuation; enhancing fair housing/fair lending enforcement and driving accountability in the appraisal industry; building a well-trained, accessible, and diverse appraiser workforce; empowering consumers to take action; and giving researchers and enforcement agencies better data to study and monitor valuation bias. 

The task force also identified several additional policy initiatives that “may have the potential to make a significant difference in ensuring fair and accurate home valuations for all communities.” On its website, PAVE commits to assessing the following areas over the next several months: 

• The expanded use of alternatives to traditional appraisals as a means of reducing the prevalence and impact of appraisal bias.

• Use of value estimate ranges instead of exact amount as a means of reducing the impact of racial or ethnic bias in appraisals.

• The potential use of alternatives and modifications to the sales comparison approach that may yield more accurate and equitable home valuation.

• Public sharing of aggregated historical appraisal data to foster development of unbiased valuation methods.

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