Regulating Housing Appraisal Bias

In a recent announcement, an interagency task force in the Biden Administration suggested that the antidiscrimination obligations of the housing appraisal industry are unclear under current federal law. The task force recommended that federal agencies issue guidance on the application of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act to the appraisal industry. These reforms would be aimed at rooting out racial and ethnic biases that plague home valuations.

In 2022, a Brookings Institution study found that homes in Black neighborhoods were valued roughly 21 percent to 23 percent below what they would have been in non-Black neighborhoods. Similarly, a 2021 study by Freddie Mac, a government-sponsored enterprise, found that a property in a Black or Latino neighborhood is more likely to receive an appraisal value below the contract price than a comparable property in a white neighborhood.

Homeownership serves as a pathway to building intergenerational wealth, and appraisals that undervalue a home reduce the amount of capital a person can access. This capital can enable a person to pay off student loans, cover medical expenses, or even start a business.

The Biden Administration task force’s action plan outlines the historical role of racism in the valuation of residential property and examines biases that appear in residential property valuation practices. It also describes steps federal agencies will take to advance equity in the appraisal process and offers recommendations that government and industry stakeholders can initiate.

Currently, the Department of Justice enforces both the Equal Credit Opportunity Act and the FHA, which protect individuals from discrimination in housing and accessing and using credit. In March 2023, the Justice Department issued a statement asserting that the FHA prohibits discrimination in home appraisals and explaining that appraisers may be liable under the FHA.

Advocates of reform argue that racial bias is still prevalent despite the FHA’s prohibition against discrimination in housing. These advocates call for diversifying and revamping the appraisal process.

In this week’s Saturday Seminar, The Regulatory Review summarizes the work of scholars addressing housing appraisal bias and how to combat it.

• In an article published in the Rutgers Journal of Law and Public Policy, John Byrnes argues that because the Fair Housing Act requires individuals to pursue private action against appraisers, current federal law does not adequately address the “pervasive and demonstrable discrimination” in the housing appraisal industry. Byrnes criticizes courts for requiring Black homeowners to make “a near-impossible showing of intentional discrimination,” which “effectively bars the courthouse doors to would-be litigations.” Byrnes suggests that only a federal regulation that empowers Black communities through stakeholder engagement and that requires anti-bias training for home appraisers will ensure that private appraisers stop using race as a criterion for home value.
• In an article in The Business Lawyer, Sasha Leonhardt of Buckley LLP and Christine M. Acree of ICE Mortgage Technology discuss ongoing changes in mortgage regulations due to the impact of the COVID-19 pandemic. Leonhardt and Acree highlight recent commitments by regulators to address appraisal bias, including President Biden’s creation of its task force on Property Appraisal and Valuation Equity (PAVE). Leonhardt and Acree also discuss the efforts of regulators to establish quality control standards for automated valuation models (AVMs), pointing out that experts disagree over whether AVMs can eliminate bias from the appraisal process. Furthermore, Leonhardt and Acree discuss the concern that including a nondiscrimination quality control factor may disproportionately affect small businesses.
• Appraisal bias persists despite regulations designed to combat it, argue Yanling G. Mayer and Frank E. Nothaft of CoreLogic in an article in Real Estate Economics. Mayer and Nothaft explain that other factors contribute to appraisal inaccuracies, such as confirmation bias, which is the tendency to search for information that confirms one’s preexisting beliefs. Furthermore, they argue that bias during the process of comparing subject properties to recent sales contributes to the overvaluation of properties. Mayer and Nothaft call for further research into the incorporation of data-driven analytics and hedonic pricing techniques that can assess appraisal accuracy.
• The appraisal industry has operated in a relatively closed, self-regulated environment, finds Maureen Yap and several coauthors in a study commissioned by the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. In their report, Yap and her coauthors examined the legal authority of the Appraisal Foundation, a private nonprofit that serves as the source of appraisal standards and appraiser qualifications, as authorized by the Financial Institutions Reform, Recovery, and Enforcement Act. Yap and her coauthors recommend incorporating the voices of civil rights and consumer advocates in the governance of the appraisal industry, filling the gaps in fair housing requirements training, amending barriers of entry to the appraisal profession, and developing compliance and enforcement mechanisms.
• In a student report for the Terner Center for Housing Innovation at the University of California, Berkeley, Hannah Gable and David Garcia explain how technology solutions can amplify federal efforts to reduce racial bias in the appraisal According to the authors, “home devaluations negatively impact revenue for public schools and homeowners.” Although President Biden’s task force recently suggested policies to address racial bias in home appraisals, private sector technological innovation and legislative efforts are needed for real progress to be made, Gable and Garcia argue. Technological innovation can reduce racial bias in home valuations by investigating historical undervaluation trends and creating new methods of evaluation. Gable and Garcia caution against overreliance on technological solutions, though, because they say that these same technologies can also perpetuate the undervaluation of communities of color if left unchecked.
• Automated appraisal models and human appraisers are essential to improving accuracy and reducing implicit bias in the appraisal process, finds Alexei Alexandrov, Laurie Goodman, and Michael Neal of the Urban Institute in a research report. Alexandrov, Goodman, and Neal investigate the changes necessary to effectuate the PAVE task force’s goals. They suggestthat AVMs are as comparable in accuracy as the current appraisal process but have a higher error rate in majority Black neighborhoods, which requires further research and attention. Alexandrov, Goodman, and Neal propose capitalizing on both the strengths of human appraisers and of AVMs in housing appraisals. In addition, Alexandrov, Goodman, and Neal argue that representation of communities of color is needed in the appraiser profession  because 97 percent of housing appraisers are white.