Steve Wiese: Lenders Must Focus on Mitigating Bias in the Appraisal Process


PERSON OF THE WEEK: For years it has been widely acknowledged in the appraisal industry that fostering greater diversity in all facets of the home buying process plays a pivotal role in diminishing the prevalence of racism, prejudice, and bias that individuals encounter.

So how can the industry mitigate bias in the assessment of residential real estate? Steve Wiese, creator of Envirocheck, Domustoria, The Homevaluemap and the Neighborhood Condition Report, has introduced a free online tool – Valuation Bias Indicator (VBI) – that is designed to mitigate bias in the appraisal process. MortgageOrb recently interviewed Wiese to learn more about the challenge of eliminating bias in appraisals and why he developed the tool.

Q: How big is the problem of bias in appraisals? Is there any data to back that up? What have you seen?

Wiese: Bias in real estate appraisals has been a longstanding concern and has garnered increased attention in recent years. The issue often revolves around racial and ethnic disparities in property valuations. A Google search provides multiple studies and investigations that have pointed to instances where appraisers’ biases may contribute to undervaluation of properties in predominantly minority neighborhoods, a phenomenon commonly referred to as “appraisal gap” or “racial appraisal gap.”

Essentially, bias in appraisals breaks down into four categories:

  • Racial disparities: Reports and studies have indicated that homes in predominantly Black or minority neighborhoods may be appraised lower than similar homes in predominantly white neighborhoods. This can lead to financial implications for homeowners, affecting their ability to build wealth through home equity.
  • Subjectivity in appraisal process: Real estate appraisal is a subjective process that involves the professional judgment of appraisers. This subjectivity can inadvertently introduce biases based on the appraiser’s experiences and perceptions.
  • Implicit bias: Implicit biases, which are unconscious attitudes or stereotypes that can influence decision-making, may play a role in real estate appraisals. Appraisers may not be consciously aware of these biases, making them challenging to address.
  • Data and studies: Several studies and investigations, including those by news outlets and academic institutions, have provided evidence of racial disparities in home appraisals. These studies often involve comparing the appraised values of homes in different neighborhoods while controlling for other relevant factors.

Efforts are being made to address bias in real estate appraisals. Some initiatives focus on providing additional training for appraisers to recognize and mitigate biases, promoting transparency in the appraisal process, and exploring the use of technology to standardize and automate certain aspects of the appraisal process.

Q: What are some of the ways that bias gets into the appraisal process? Can you provide a few examples?

Wiese: Bias in real estate appraisal can enter the process through various channels, subjective judgment, implicit biases, and systemic factors. What follows are some examples of how bias can manifest in the real estate appraisal process:

  • Neighborhood stereotypes: Appraisers may hold preconceived notions or stereotypes about certain neighborhoods, associating them with characteristics such as crime rates, socioeconomic status or school quality. These stereotypes can influence the perceived value of properties in these areas.
  • Comparables selection: The selection of comparable properties for valuation is a crucial aspect of the appraisal process. If appraisers predominantly choose comparables from higher-priced or predominantly white neighborhoods when appraising a property in a minority neighborhood, it can lead to undervaluation.
  • Subjective adjustments: Appraisers often make adjustments to the valuation based on various factors such as the size of the property, condition and amenities. The subjective nature of these adjustments can introduce bias, as appraisers may unconsciously assign different values to similar features based on the neighborhood’s demographics.
  • Implicit bias: Implicit biases, which are unconscious attitudes or stereotypes, can influence the appraiser’s judgment. For example, an appraiser might unconsciously favor or disfavor a property based on the race or ethnicity of the homeowner.
  • Lack of diversity in the appraisal profession: The demographics of the appraisal profession may contribute to bias. If the majority of appraisers are from a particular demographic, they may bring their own perspectives and biases into the valuation process.
  • Data quality issues: Appraisers rely on data to inform their valuations. If historical data includes biases or inaccuracies, it can perpetuate disparities in property valuations. For instance, if past appraisals in a neighborhood were biased, they may serve as a reference point for future appraisals.
  • Inadequate training: Appraisers may not receive sufficient training on recognizing and mitigating biases. Training programs that address cultural competency and sensitivity to diverse communities can help reduce the impact of bias.

Efforts to address these issues involve promoting diversity within the appraisal profession, providing ongoing training to appraisers on recognizing and mitigating bias, and exploring technological solutions that can bring more objectivity to the valuation process.

Q: What about the compliance aspects of bias in appraisals? Do regulations to prevent bias in appraisals already exist? If so, what are they?

Wiese: Yes, there are regulations in place to address and prevent bias in real estate appraisals. These regulations aim to promote fair housing practices, eliminate discriminatory practices, and ensure that appraisals are conducted without bias. Some key regulations include the following:

  • Equal Credit Opportunity Act (ECOA): ECOA is a federal law that prohibits discrimination in the extension of credit, which includes the appraisal process. The law prohibits creditors from discriminating against applicants on the basis of race, color, religion, national origin, sex, marital status, age or because an applicant receives income from public assistance.
  • Fair Housing Act (FHA): The FHA is a federal law that prohibits discrimination in the sale, rental, and financing of dwellings based on race, color, religion, sex, national origin, familial status, and disability. Discrimination in real estate appraisals that is based on any of these protected characteristics is also prohibited under the FHA.
  • Uniform Standards of Professional Appraisal Practice (USPAP): USPAP, developed by the Appraisal Standards Board (ASB) of the Appraisal Foundation, sets the standards for real property appraisers in the United States. USPAP requires appraisers to be unbiased and to avoid conflicts of interest. It emphasizes the importance of impartiality and objectivity in the appraisal process.
  • Dodd-Frank Wall Street Reform and Consumer Protection Act: This legislation includes provisions aimed at ensuring the accuracy of property valuations. It established the requirement for appraisal independence, preventing undue influence on appraisers and ensuring that appraisals are based on the property’s true market value.
  • Office of the Comptroller of the Currency (OCC) guidelines: The OCC provides guidelines to national banks and federal savings associations on appraisal practices. These guidelines emphasize the importance of fair and impartial appraisals, and they provide recommendations on risk management practices related to real estate appraisals.

In addition to federal regulations, many states may have their own laws and regulations governing real estate appraisals. These regulations collectively work to prevent bias, discrimination and undue influence in the appraisal process, promoting fairness and equal treatment in real estate transactions. 

Q: Have any lenders or AMCs ever been accused of allowing bias to enter their processes?

Wiese: Yes, there have been instances where lenders and appraisal management companies (AMCs) have faced accusations of allowing bias to enter their real estate appraisal processes. Complaints and legal actions have been raised when there are allegations of discriminatory practices, particularly in cases where appraisals are believed to be influenced by factors such as race, ethnicity, or neighborhood demographics. What follows are a few examples:

  • Ally Financial (formerly GMAC Mortgage): In 2013, Ally Financial settled with the U.S. Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB) over allegations of discrimination in auto lending and mortgage practices. The settlement included accusations that African-American, Hispanic and Asian/Pacific Islander borrowers were charged higher interest rates on auto loans and that there were disparities in the pricing of homes in minority neighborhoods.
  • Wells Fargo: In 2012, Wells Fargo reached a settlement with the DOJ over allegations of discriminatory lending practices, including allegations related to the pricing of mortgage loans and disparities in the treatment of African-American and Hispanic borrowers. The settlement included provisions aimed at preventing future discriminatory practices.
  • SunTrust Mortgage: In 2012, SunTrust Mortgage settled with the DOJ over allegations of discriminatory lending practices, including pricing disparities for African-American and Hispanic borrowers. The settlement involved compensation for affected borrowers and changes to the company’s lending practices.

These cases highlight the importance of addressing potential bias in lending and real estate appraisal processes. They have also led to increased scrutiny of industry practices and efforts to enhance transparency, training, and compliance measures to prevent discriminatory practices in the future.

It’s essential to note that these examples represent specific cases, and not all lenders or AMCs engage in discriminatory practices. However, these instances underscore the ongoing need for vigilance and efforts to promote fair and equitable lending and appraisal practices in the real estate industry.

Q: Are there strategies appraisers and lenders can use beyond your tool to help mitigate bias? If so, what are they?

Wiese: Certainly, there are several strategies that appraisers and lenders can employ to help mitigate real estate appraisal bias. These strategies aim to promote fairness, transparency, and objectivity in the appraisal process. What follows are some key approaches:

  • Diverse and inclusive training: Provide appraisers with training on diversity and inclusion, cultural competency and fair housing laws. This training can raise awareness of potential biases and help appraisers make more informed and objective decisions.
  • Standardized procedures: Implement standardized appraisal procedures to reduce subjectivity in the valuation process. Clearly defined guidelines can help ensure consistency in the selection of comparables, adjustments and overall appraisal methodology.
  • Data analysis: Regularly analyze appraisal data for patterns of disparities. By examining appraisal outcomes across different demographic groups and neighborhoods, lenders and appraisers can identify potential bias and take corrective actions.
  • Diversity in the appraisal profession: Promote diversity within the appraisal profession. A more diverse pool of appraisers may bring different perspectives and reduce the likelihood of unconscious biases affecting the valuation process.
  • Use of technology: Explore the use of technology, such as automated valuation models (AVMs) and machine learning algorithms, to provide additional checks and balances. These tools can assist in standardizing the appraisal process and minimizing the impact of individual biases.
  • Independent quality control: Implement independent quality control processes to review appraisals for fairness and accuracy. This can involve a second appraisal review by a qualified professional or an automated review process that flags potential discrepancies.
  • Community engagement: Foster engagement with the communities being appraised. This can include input from local residents, community organizations or other stakeholders to provide a more comprehensive understanding of the neighborhood and its unique characteristics.
  • Clear communication: Ensure clear and transparent communication between appraisers and lenders. Appraisers should be encouraged to communicate openly about challenges or concerns they face during the appraisal process.
  • Ethical guidelines: Reinforce adherence to ethical guidelines within the appraisal profession. Emphasize the importance of objectivity, impartiality and the avoidance of conflicts of interest.
  • Regular training updates: Provide ongoing training and updates to appraisers to keep them informed about evolving industry standards, regulations and best practices. This continuous education can help appraisers stay current on fair housing laws and other relevant considerations.

By adopting a combination of these strategies, appraisers and lenders can contribute to a more equitable and unbiased real estate appraisal process. It’s important to note that addressing bias is an ongoing effort that requires collaboration among industry stakeholders, policymaker, and the communities affected by real estate appraisals.

Q: What is USHousingMarket.Info‘s Valuation Bias Indicator (VBI)?

Wiese: USHousingMarket.Info’s Valuation Bias Indicator (VBI) is a solution designed for lenders and appraisers aiming to elevate appraiser due diligence and mitigate bias within the appraisal process. The free online tool provides a comprehensive framework, assisting appraisers and lenders in minimizing unintentional biases and enhancing the overall integrity of property valuations.

Q: Who developed it?

Wiese: I developed the VBI myself. I am a certified residential appraiser in metro Detroit with over 30 years of experience. My background includes the development of previous sites and underwriting methods such as Enviro Check, and My intellectual property is licensed by many in the lending and real estate industry. The VBI was created as a solution to address appraisal bias for lenders, appraisers and the public.

Q: How does the tool work?

Wiese: The VBI evaluates the diversity level within the market of the subject property, influencing the appraisal process. If the diversity is low, there is a higher probability of bias, requiring appraisers with strong familiarity or geographic competency. Conversely, a high diversity level reduces potential bias, allowing most appraisers from the immediate and greater market to serve effectively.

Q: What makes this tool unique in the marketplace?

Wiese: The VBI stands out in the marketplace because it provides appraisers and lenders with a means of due diligence concerning appraisal bias on an individual basis. 

Mortgage lenders should be aware of the VBI as it offers a proactive measure to address potential biases in property appraisals. Encouraging its inclusion in appraisals demonstrates a commitment to accuracy and impartial valuation, fostering trust and transparency among all parties involved in the transaction.

The VBI aids in identifying, confronting and rectifying any underlying biases, resulting in a more equitable and precise appraisal process.

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