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It’s been over 50 years since federal regulators passed the Fair Housing Act to ban discriminatory lending practices. Despite this, Black and Latino families are routinely denied mortgage loans at rates white families enjoy and the racial homeownership gap is wider than it’s ever been. In 2021, Black homeownership rates were at 44%, while 74% of white individuals owned a home.
Homeownership is the traditional path to building wealth in America—it’s baked into the American dream. Lisa Rice, EVP of the National Fair Housing Alliance, recently told the Chicago Tribune, “Wealth and financial stability are inextricably linked to housing opportunity and homeownership…For a typical family, the largest share of their wealth emanates from homeownership and home equity."
The median white family in America currently holds eight times the wealth of Black families and five times the wealth of Latino families.
On June 1, 2021, in an effort to introduce more equity into property appraisals for families of color, the White House announced its Action Plan to Advance Property Appraisal and Valuation Equity. Known as PAVE, the interagency initiative was tasked with evaluating the causes, extent, and outcomes of appraisal bias in the mortgage lending industry and submitting recommendations to eliminate racial and ethnic bias in home valuations.
Among their recommendations, the PAVE task force identified the extended use of alternative valuation products like desktop and hybrid appraisals to help reduce appraisal bias and make homeownership more accessible to people of color.
In this blog post, we’ll provide an overview of the federal government’s action plan to address property valuation inequality in the United States and discuss the role of alternative valuation products in achieving this crucial goal.
The Importance of Unbiased Appraisals in Fighting Property Valuation Inequity
A real estate appraisal is completed by a licensed appraiser. It's their opinion of a property’s value as determined by the house’s physical characteristics, features, condition, and comps to homes for sale in the surrounding area. Traditional appraisals are completed by trained and certified real estate professionals who are licensed to gauge the value of a property, primarily to help secure a mortgage, refinance, or purchase a new home. The main objective of an appraiser is to help assure lenders that the loan amount does not exceed the value of the property.
Appraisers typically factor in the following characteristics of a home to determine its appraised value:
- Overall condition of the home
- Home features
- Square footage of home
- Acreage of property lot
- Additions to the home
- Surrounding amenities
According to the PAVE Action Plan, “An appraiser’s opinion of value is very dependent on that appraiser’s selection of comparable properties and the adjustments and weighting the appraiser applies to those selections. This decision has subjective elements that depend on the expertise of the appraiser and the appraiser’s familiarity with the neighborhood, resulting in a natural imprecision of the appraiser’s estimate of the home’s value.”
Studies Point to Existing Appraisal Bias in U.S. Housing Market
The PAVE Task Force reports, “On average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents. Statistical analyses show that accounting for neighborhood and property characteristics and amenities—such as the age of the property or its proximity to public transportation—does not explain the entire disparity. Recent research has identified appraisals as one of the drivers of the gap.”
What can be done about current appraisal bias in the U.S. housing market? In their official recommendations for policy initiatives that could help ensure fair, accurate home valuations for all communities, the PAVE task force identified alternative appraisal options as one possible solution.
Industry leaders at Fannie Mae are following course. According to the lending giant, “To minimize the chance that the race of a borrower or homeowner is one of those reasons, we and our industry partners are taking concrete actions such as increasing the use of alternative-scope valuation approaches.”
What Are Alternative Valuation Products?
Desktop and hybrid appraisals are the two primary alternatives to traditional appraisals.
A desktop appraisal is a property appraisal conducted remotely by a licensed appraiser using market research, tax records, MLS records, and other available digital resources to guide their valuation decision. As the name implies, an appraiser can conduct a desktop appraisal without ever leaving their computer.
A hybrid appraisal is conducted like a desktop appraisal, but the appraiser is also armed with additional information from a third party to help them determine the home’s value. These resources might include:
- Photographs of the exterior and interior of the house by a third party
- A property inspector or real estate appraiser’s interior inspection
- Driving by the outside of the house and getting interior inspections from a credible source
- Getting a tour of the interior via video chat with the homeowner
Communities of color have already lost billions of dollars in accumulated wealth solely through the appraisal process. As mortgage industry leaders, I believe we all need to be responsible to ensure we are part of important industry discussions regarding appraisal bias and inequity, and discrimination practices.
As Executive Vice President, Lending & Insurance Solutions, Ty Harrison leads teams of lending and insurance professionals that are dedicated to delivering value-added programs, services and technology tailored to address the needs of lenders, loan servicers, portfolio managers, mortgage brokers, insurance agents and insurance brokers.