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Freddie Mac Finds ‘Pervasive’ Bias in Home Appraisal Industry

Vic

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Jun 12, 2001
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Cliff notes: Mortgage giant Freddie Mac did a comprehensive study of over 12 million purchase money mortgage transactions and determined that borrowers in predominately black or Hispanic neighborhoods are about twice as likely to see their home appraise for less than the purchase contract price. This is indisputable evidence of systemic racism in the real estate industry.

Freddie Mac Finds ‘Pervasive’ Bias in Home Appraisal Industry

A study from the Federal Home Loan Mortgage Corporation, known as Freddie Mac, adds to a growing body of research that finds racism in the appraisal industry is undervaluing the homes of Black and Latino Americans compared to white-owned homes.

In an analysis of more than 12 million housing appraisals, Freddie Mac researchers found that “appraisal gaps seem pervasive” in lowering home value determinations in Black and Latino neighborhoods.

Other recent studies have shown that homes in Black neighborhoods are appraised at lower values than similar homes in white neighborhoods by as much as 23% on average, and that that appraisal gap is wider now than it was in the 1980s. These disparities have helped widen the wealth gap between Black and Latino families and white ones.

For years, the leading professional appraisal organizations have denied that racism is at work in the industry, and explained away news stories about it as the actions of a few individual appraisers. Only recently did appraisal industry leaders acknowledge that a problem exists, and have begun taking steps this year to investigate it.

The new Freddie Mac study shows a few places in the industry where it can be found. Examining housing appraisals from Jan. 1, 2015 to Dec. 31, 2021, researchers found:


12.5% of appraisals in majority-Black census tracts came in below the contract price of the houses they assessed compared to 7.4% of appraisals in white tracts. For appraisals in majority-Latino tracts, 15.4% were valued lower than the contract price. For both Black and Latino areas, the percentage of undervalued appraisals increased as the white population percentage decreased.


The undervalued appraisals occurred more frequently in Black and Latino tracts even when taking structural and neighborhood characteristics into account.


Racial gaps were found even when just looking at the race of the mortgage applicant as opposed to the neighborhoods the homes were in: 8.6% of Black applicants received appraisals lower than the contract price of the house, as did 9.5% of Latino applicants, compared to 6.5% of white applicants and 7.1% of applicants overall.

As for the idea that bias might only occur among a small number of appraisers, the study found when analyzing the appraisal reports of several thousand appraisers that the majority of them reported “statistically significant” racial gaps in their valuations. The study’s authors wrote that they hadn’t identified a root cause for these gaps, but that they are testing alternative appraisal methods for more equitable outcomes.

Junia Howell, a sociology professor at the University of Illinois, Chicago, who’s conducted several studies on appraisal bias, says this study reinforces that the disparity is systemic.

“The question of: Is it just a few bad apples? Is it just a few appraisers that are creating this inequality? What [the study] shows is actually, no, it’s almost everyone,” says Howell. “Yes, individual bias is definitely affecting these things, but it’s actually a structural issue, across different appraisers who have different backgrounds, and in different counties. We’re seeing this inequality across the board, really demonstrating that it is deeply embedded in the ways and the methods of appraising.”

The Appraisal Institute, an international professional association representing the real estate appraiser profession, has only recently acknowledged that racial bias is an issue in appraisals after a change in leadership, though it still hasn’t fully committed to the idea that the bias is structural. In response to the Freddie Mac study, AI President Rodman Schley said in a statement that “unconscious bias is real and exists in all industries.”

“Appraisal is one piece of a larger ecosystem, and appraisal groups are working alongside consumer groups, real estate brokers and agents, banks, government agencies, think tanks and others to explore where housing inequities may stem from and what combination of solutions should be considered,” Schley said.

Freddie Mac isn’t the only federal entity looking into this problem. Earlier this year, President Joe Biden announced the creation of an interagency task force to address home appraisal inequities. That group, called the Property Appraisal and Valuation Equity task force, chaired by U.S. Department of Housing and Urban Development Secretary Marcia Fudge and Domestic Policy Council Director Susan Rice, will release a report in the months ahead detailing the “extent, causes and consequences” of appraisal discrimination and a policy roadmap to help root it out.

Appraisal bias complaints have increased tenfold since 2019, HUD’s Alanna McCargo said at a June event
hosted by the Consumer Financial Protection Bureau. Freddie Mac is currently working with the Appraisal Institute on diversity initiatives to bring more people of color into the industry, which is 96.5% white, according to data from the U.S. Bureau of Labor Statistics. Over the last 12 years, there has been a “20 to 25% decline” in the number of registered appraisers overall, according to Jim Park, executive director of the Appraisal Subcommittee, the federal oversight agency for appraisers.

“Not only is the profession faced with a lack of diversity, it is also faced with an aging population, declining numbers, and few new entrants, even as demand for appraisal services has been increasing,” Park said during a panel discussion at the June CFPB event. Referencing earlier research on bias in the industry, he added: “I find these allegations and revelations about the appraisal industry to be deeply disturbing.”
 
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Moonbeam

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This is confusing. Racism was ended in the US. There aren’t any racists anymore and good people on both sides. What we have is bigotry against evangelicals. Now that’s rampant.

Maybe if economists could work out the economic costs racism has cost Black Americans we could pass laws that allow that amount in all forms of taxes as deductions.
 

[DHT]Osiris

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I speak as an anecdote, not data, but I will note that upon purchasing my home, I got an appraisal 'readjustment' of approximately +5%. Not sure that the neighborhood is predominately anything, but the town had/has a high minority population.
 

Vic

Elite Member
Jun 12, 2001
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I won't go into any detail, but in real life I do happen to work for a mortgage lender and this is one of our big hot button issues. And not because we're "woke" or any BS like that, but because this issue is resulting in many of our customers being unfairly denied a mortgage and the opportunity for homeownership. It is bullshit, and it needs to stop.
 

Vic

Elite Member
Jun 12, 2001
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I speak as an anecdote, not data, but I will note that upon purchasing my home, I got an appraisal 'readjustment' of approximately +5%. Not sure that the neighborhood is predominately anything, but the town had/has a high minority population.
This could have been due to something as simple as a revision (ie lender asks appraiser why they used an inferior comp when more suitable comps were available, and the appraiser decides to use a more suitable comp, resulting in a revised opinion of value). Or it could have been that some lenders are beginning to implement pushback programs against appraisers with demonstrated patterns of bias. Due to improvements in technology, lenders now have access to tremendous amounts of data, which is uncovering many of the bad practices and bad actors in the industry. Of which, I hate to say, there are many.
 

IronWing

No Lifer
Jul 20, 2001
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My faith in the appraisal industry took a dive when we re-financed our house and the lender changed the appraisal by 30% in one week. The average of the two appraisals just happened to be the magic number needed to meet the lender's loan requirements.

That said, is comparing a contract price to an appraised value a valid measure of defect, even in aggregated data? Is systematic appraisal bias the problem or is price gouging in minority neighborhoods the issue? I really don't know.
 

[DHT]Osiris

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Dec 15, 2015
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This could have been due to something as simple as a revision (ie lender asks appraiser why they used an inferior comp when more suitable comps were available, and the appraiser decides to use a more suitable comp, resulting in a revised opinion of value). Or it could have been that some lenders are beginning to implement pushback programs against appraisers with demonstrated patterns of bias. Due to improvements in technology, lenders now have access to tremendous amounts of data, which is uncovering many of the bad practices and bad actors in the industry. Of which, I hate to say, there are many.
FWIW this was a while ago, probably 10-12y at this point. Just gave me a chuckle how I bought the place, then immediately after someone somewhere else decided it was worth more.
 

HomerJS

Lifer
Feb 6, 2002
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Listen to a couple tell their own story about the non-existent systemic racism in the real estate industry
 
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Mar 11, 2004
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so basically red-lining is alive and well.
Yup.

I won't go into any detail, but in real life I do happen to work for a mortgage lender and this is one of our big hot button issues. And not because we're "woke" or any BS like that, but because this issue is resulting in many of our customers being unfairly denied a mortgage and the opportunity for homeownership. It is bullshit, and it needs to stop.
This post is like women that say they're not feminists, and it turns out they actually are but don't like the label because asshole misogynist men have tried very hard to give it an inherently negative connotation.

Stop helping the assholes doing that shit to keep doing it by agreeing with them about their hatred of terms that are actually positive (woke, anti-fascist, etc).
 

Vic

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Jun 12, 2001
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Yup.



This post is like women that say they're not feminists, and it turns out they actually are but don't like the label because asshole misogynist men have tried very hard to give it an inherently negative connotation.

Stop helping the assholes doing that shit to keep doing it by agreeing with them about their hatred of terms that are actually positive (woke, anti-fascist, etc).
I kinda thought I was pretty clear about not helping the assholes, but ok :)

A lot of the right-wing seems to like using terms like "woke" to imply that "woke" practices are somehow bad for business, ie "go woke go broke," and I was countering that. We are "woke" because allowing our customers to be discriminated against is flat-out bad for our business.
 
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herm0016

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Feb 26, 2005
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@Vic

somewhat related: I recently had an appraiser for the buyer of a house I am selling come in, and not provide a value and blacklist the home because he believes the attached, original 1967 apartment is an illegal accessory dwelling unit, then call the county zoning people and get them involved, and now they are screwing us around by making us remove a stove that was clearly installed in about 1967 when the unit was totally legal, and holding up the sale of the home, the sale of the home the buyers live in now, and a huge chunk of our money that will pay off everything we had to move around for the down on the new place.

would you say they are out of their lane? Sure, take the sq feet of the ADU off the appraisal for value purposes, but GD, calling the county and telling everyone the home can not be sold as it exists? both realtors and the bank are totally flummoxed that this one person is holding up the whole deal.

anyhow. i can totally see how some power hungry egotist could get a kick out of telling everyone what they think stuff is worth, and putting in their own bias. maybe we can create some kind of algorithm like the Zillow price, but better to take out the bias.
 

Vic

Elite Member
Jun 12, 2001
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@Vic

somewhat related: I recently had an appraiser for the buyer of a house I am selling come in, and not provide a value and blacklist the home because he believes the attached, original 1967 apartment is an illegal accessory dwelling unit, then call the county zoning people and get them involved, and now they are screwing us around by making us remove a stove that was clearly installed in about 1967 when the unit was totally legal, and holding up the sale of the home, the sale of the home the buyers live in now, and a huge chunk of our money that will pay off everything we had to move around for the down on the new place.

would you say they are out of their lane? Sure, take the sq feet of the ADU off the appraisal for value purposes, but GD, calling the county and telling everyone the home can not be sold as it exists? both realtors and the bank are totally flummoxed that this one person is holding up the whole deal.

anyhow. i can totally see how some power hungry egotist could get a kick out of telling everyone what they think stuff is worth, and putting in their own bias. maybe we can create some kind of algorithm like the Zillow price, but better to take out the bias.
If the additional unit is original to the property, then I would agree that the appraiser is out of their lane. Most likely he couldn't find any permits for the addition (which he wouldn't if it's part of the original structure), and unpermitted improvements can be an issue for sure, but going to the county and blocking the sale do not seem like appropriate actions IMO. I would advise a complaint to your state real estate appraiser board.
 
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herm0016

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yes, its clearly orginal to the property, as all the fixtures, plumbing, electrical are of the same type/ vintage as the main house. same breakers, wire insulation, attic insulation, etc...
 

Cozarkian

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Feb 2, 2012
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The whole concept of an appraisal at the time of sale is idiotic. An appraisal is supposes to estimate the price a house would sell at if it was on market. If the house is actually on the market and an offer has already been made, that is the best evidence of the potential sale price for the house.

Also, one reason this discrimination has become a problem is it is self-perpetuating. If a racist appraiser gives a lower value for a house in a black neighborhood, forcing the seller to accept a lower purchase price, the next house sold in the neighborhood will likely use the prior sale as a comp. This means that a non-racist appraiser will also give lower appraisals in black neighborhoods because the appraisal is based on the sale of nearby homes that were previously incorrectly appraised.
 

IronWing

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Jul 20, 2001
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The whole concept of an appraisal at the time of sale is idiotic. An appraisal is supposes to estimate the price a house would sell at if it was on market. If the house is actually on the market and an offer has already been made, that is the best evidence of the potential sale price for the house.
The appraisal is supposed to inform the mortgage lender in making a decision to lend on the value of the property. If the property is worth less than the loan amount, the lender is at greater risk.
 
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Jaskalas

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Jun 23, 2004
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Maybe there are efforts to lower the cost of home ownership in minority neighborhoods. Causing deflationary values.
Or simply... white areas have more money chasing them. Causing inflationary pricing out of thin air.
 

dullard

Elite Member
May 21, 2001
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The whole concept of an appraisal at the time of sale is idiotic. An appraisal is supposes to estimate the price a house would sell at if it was on market. If the house is actually on the market and an offer has already been made, that is the best evidence of the potential sale price for the house.
I actually think that is the worst possible evidence of the house value. If I offer $1 million for your used toothbrush, go into a bank to get a loan, should the bank just value the used toothbrush at $1 million since there was an offer for that value? Heck no. You just took out any objective evidence of worth and went with whatever strange obsession that I have with your used toothbrush. Conversely, if the bank lender is desperate for a commission, the bank lender telling the appraiser what to value the toothbrush at (it must be $1 million or the deal will not go through and we'll stop using you as an appraiser!) is just a recipe for bank failures. All the perverse incentives are there to get the deal done and no true valuation is reached.

The subprime housing crash was in large part due to appraisers doing exactly what you propose: valuing the house at exactly what the buyer offered regardless of its true worth. Then suddenly, it was found out that no the houses are not worth that much and the banks were screwed (and the buyers were screwed and all people screwed by the collateral damage). I personally think the appraisers should NOT know about the offer amount. That way everyone can get an independent value that is not swayed by emotions. You then have at least two parties (buyer and appraiser) operating completely independently and both value the house at roughly the same amount, or the sale does not go through.

What you propose does work in true competition. Think things that are continuously bought and sold by many parties and no true distinguishing feature. Think a bushel of field corn or a share of Apple stock. They are all about the same. Then appraising things at the value that was offered is a pretty good method. But houses are not like that. A neighborhood may only have a couple of recent sales and rarely are houses actually identical (especially older houses). They tend to all be unique unicorns.
 
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dullard

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May 21, 2001
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maybe we can create some kind of algorithm like the Zillow price, but better to take out the bias.
Cozarkian answered that. Discrimination is self-perpetuating. Housing in an area is discriminated against lowering its perceived value. Program in a computer algorithm to determine value based on past values, and now the computer will be programmed to give discriminatory values--without even knowing the race of anyone involved. Low values outputted from a machine mean that only low prices can be had for the houses. That proves that the houses were worth less and the computer was right. Or not. Maybe it just proves that the discrimination was there at the start.
 
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