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There have been a number of stories over the past few years with assertions of racial bias by appraisers on home refinance or home equity loan appraisals. The stories go like this: After getting what the Black borrower believes is a low valuation, they remove all traces of race from their homes and have a White friend stand in on the second appraisal appointment, resulting in a much higher valuation in the second appraisal. The implication is that intentional and unintentional bias is commonplace, pervasive and systemic, resulting in large valuation gaps for Black borrowers relative to White borrowers.
The question is, is there anything more than empirical evidence to support such a broad conclusion? This is not a new issue, it has been part of appraisal standards of professional practice and education requirements for the 38 years I have been appraising. This new light on this issue does provide an opportunity to see how appraisers are doing, relative to this issue. I am aware of two large scale studies on this topic.
The first study was by Fannie Mae, a government sponsored entity and the largest purchaser of home mortgages in the US. In February 2020, they released a Working Paper titled “Appraising the Appraiser”, which examined divergent appraisal values for Black and White borrowers when refinancing their homes. In this paper, they compared 1.8 million appraisals in 2019 and 2020 automated valuation models (AVMs). An AVM is a computer generated value using regression analysis. The major results of this study were:
(1) Black borrowers received a slightly lower appraised value relative to automated valuation models (AVMs), while White borrowers received a slightly higher appraised value using these same models.
(2) Six states, all in the South, including Georgia, Louisiana, South Carolina, North Carolina, Mississippi and Alabama, accounted for nearly half the overvalued homes of White owners in majority Black neighborhoods.
(3) The frequency of “undervaluation” did not have a notable racial pattern. In predominately White neighborhoods, there was no measurable difference. In predominately Black neighborhoods, the difference was within one percentage point.
The second study was by American Enterprise Institute Housing Center (AEI), a non-profit group founded in 1938 that studies housing issues. They released a report in May 2022 titled “How Common is Appraiser Racial Bias-An Update”. The results of this study increased the sample size from 240,000 in the first study to 890,000 in the update study, but the results were similar. This study, like the Fannie Mae study, compared appraisals to AVMs. Like in the Fannie Mae study, this study found that the appraisals for Black borrowers came in lower than the AVMs about one percent more often than for White borrowers.
Based on these two studies, appraiser racial bias is not commonplace, pervasive or systemic, but it does happen on a small scale and it appears to be more of a problem in the South. My opinion is that this does not mean we should do nothing about it, but it does mean we should not blow the problem out of proportion. Using technology, organizations like Fannie Mae could help to weed out the few “bad apples” that are likely creating most of the problems. In addition, I think it is important for all of us, regardless of what profession we are in, to self exam and be open to change where change is needed in our thinking and in our communication in relation to racial issues.
-Jeff Jorgensen, SRA
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