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Fannie Mae Examines Appraisal Inequality

Fannie Mae has released a Working Paper titled, “Appraising the Appraisal,” examining divergent appraisal values for Black and white borrowers when refinancing their home.

According to an analysis of 1.8 million appraisals in 2019 and 2020 by Jake Williamson, Fannie Mae’s SVP of Collateral Risk Management, and Mark Palim, Fannie Mae’s VP and Deputy Chief Economist.

Major findings of the Paper include:

  • Black borrowers refinancing their home on average received a slightly lower appraisal value relative to automated valuation models (AVMs).
  • Homes owned by white borrowers were more frequently overvalued than homes owned by Black borrowers.
  • Six states, including Georgia, Louisiana, South Carolina, North Carolina, Mississippi, and Alabama, accounted for nearly 50% of the overvalued homes of white owners in majority-Black neighborhoods.
  • The frequency of “undervaluation” did not have a notable racial pattern.

“While most studies have focused their research at the neighborhood or census tract level, Fannie Mae targeted its appraisal research to isolate valuation differences at the property and borrower level, along with further analyses that focused on the racial composition of neighborhoods,” said the Working Paper.

In neighborhoods with a high concentration of Black homeowners, white-owned properties were overvalued 10 percentage points more frequently than Black-owned properties. This difference in frequency of overvaluations along race may well be due to factors other than racial bias in appraisals, such as gentrification.

The concentration of overvalued white-owned homes in majority-Black neighborhoods also had a distinct geographic element. Nearly half (49.2%) of the overvalued, white-owned properties in majority-Black neighborhoods were concentrated in the southeast in Georgia, Louisiana, South Carolina, North Carolina, Mississippi, and Alabama. These six states contained 40.5% of white borrowers in the sample who reside in majority-Black neighborhoods.

The Working Paper suggests several ways in which the issue of appraisal inequality can be rectified, including:

  • Increasing the use of alternative-scope property valuation approaches.
  • Building on existing safeguards to detect valuation errors.
  • Continuing to modernize the valuation approach for home loans through advancements in technology.
  • Fostering diversity in the appraiser workforce through endeavors such as the Appraiser Diversity Initiative, sponsored by the Appraisal Institute, Fannie Mae, Freddie Mac, and the National Urban League.
  • Enhancing the tools appraisers use to validate their opinions.

Click here to view Fannie Mae’s Working Paper “Appraising the Appraisal.”

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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