Four Resources for Fighting Appraisal Bias 

BLOG VIEW: It’s a well-known fact: a home is often a person’s largest asset and, therefore, their most significant source of wealth. This is especially important for minority communities. The Urban Institute reports that homeownership is the primary driver for wealth building for Black households, however, many believe access to equity and homeowner wealth is not being fairly applied in minority communities due to potential bias in the home finance industry.

One area that has come into the spotlight recently is home appraisals. There are many reasons why minority homeowners believe they are not accruing wealth the way others have, and one of the factors under scrutiny now is potentially inaccurate property valuations. 

The Effects of Appraisal Bias

A study from The Brookings Institution, “Racial Disparities in Home Prices Reveal Widespread Discrimination,” identifies multiple examples of racial bias. In Denver and San Francisco, there are instances where Black families invested significant money to renovate their homes but received an appraised value hundreds of thousands of dollars lower than the property’s worth before their renovation work. After removing all indicators of the owner’s race from the homes, these properties were re-appraised, and both received much higher valuations more in line with what they believed was reasonable and fair for the neighborhood.   

While these instances are more of an exception than the rule, it is safe to assume there may be other stories where the homeowner was unaware their valuation was lower than the true market value or did not know the process to obtain a second opinion of value.  Regardless, the issue of appraisal bias is not up to the homeowner to fix. It is up to the industry to ensure proper protections are in place to safeguard against unfair and inaccurate valuations. 

Four Resources to Help

While it is an unfortunate truth that bias persists in our industry today, the good news is that there are advancements in the industry designed to combat and eliminate bias in property valuations.

What follows are four resources that can help lenders ensure their customers are getting an objective and accurate valuation.

1. PAVE

The first way the industry is addressing appraisal bias is through the Property Appraisal and Valuation Equity (PAVE) Task Force. PAVE was commissioned by President Biden to evaluate “the causes, extent, and consequences of appraisal bias and to establish a transformative set of recommendations to root out racial and ethnic bias in home valuations” and the task force includes 13 different government agencies including the FHFA, HUD, the CFPB, the Federal Reserve and the FDIC.

A few points in the PAVE action plan include:

• Develop data-sharing arrangements among all relevant government agencies and pursue joint strategies to make appraisal-related data more widely available, foster federal research, and better enable enforcement related to appraisal bias.
• Develop a legislative proposal that modernizes the governance structure of the appraisal industry to improve transparency and public participation in the establishment of appraisal standards and appraiser qualification criteria, and to advance diversity in the profession.
• Define metrics that can help to identify and measure patterns of mis-valuation in the property valuation process and address potential bias in the use of technology-based valuation tools through rulemaking related to Automated Valuation Models (AVMs).

2. Bias Word Search

Another strategy for minimizing potential bias is to identify and eliminate subjective language and “code” words in appraisals. Certain terms like “desirable neighborhood” and “affordable neighborhood” are terms with a potentially biased connotation. Most importantly, these terms denote an opinion, while appraisals should be based on fact. 

Rather than saying “desirable,” the appraiser could list neighborhood amenities. “Affordable” is also a subjective term, so instead, the appraiser could simply discuss how the subject property’s neighborhood price range compares to those in nearby areas. 

Moving away from subjective language and “code” words is a great first step to reassure homeowners that their property valuations are more fact-based rather than subjective and potentially biased. Additionally, using technology and automated review tools, lenders can scan submitted appraisals to identify subjective words and phrases that could be considered biased and flag them for a closer look.

3. ADI

The Appraisal Diversity Initiative (ADI) is a nationwide program led by Fannie Mae, Freddie Mac, and the National Urban League. The goal of ADI is to reach out to diverse, talented candidates, educate them about the appraisal profession, and provide resources for interested candidates to help them get started in the profession.

Currently, there is a large disparity between the demographics of the appraiser population and the homebuyers and homeowners in some of the communities they serve. According to research from Zippia, the vast majority of appraisers in the country are older white men. To better reflect all communities fairly and objectively, efforts are underway to add youth and diversity to the profession.

4. AVMs

In certain instances, Automated Valuation Models (AVMs) provide a strong and objective alternative to traditional appraisals. Since AVMs are not privy to any specific neighborhood or borrower demographics, they can be used to provide a neutral, unbiased second opinion to the traditional appraisal valuation.  There are questions about algorithmic bias in the data and methodology used by AVMs, and there is ongoing research to investigate the possibility of AVM bias. To date, some AVMs have been extensively studied to ensure there is no evidence of bias in their algorithms.  

Working Toward Progress

Appraisal bias is a critical issue for this industry to address. With more attention focused on potential valuation bias, diversity initiatives, and automated tools, we can ensure the lending process is fair and equitable to every homeowner and borrower in the housing finance industry.

Jeffrey Hogan is vice president of valuations at Veros Real Estate Solutions, a leader in enterprise risk management, disaster data solutions, and collateral valuation services. He is a state-certified residential appraiser with more than 30 years experience and is an expert on the tools available to help lenders and appraisers manage valuations.