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Report: Just How Commonplace Is Appraisal Bias?

An analysis by the American Enterprise Institute’s (AEI) Housing Center of the Federal Housing Finance Agency’s (FHFA) Uniform Appraisal Dataset (UAD) Appraisal-Level Public Use File (PUF) has found that large differences in the share of under-valuations—appraisals where the appraised value is below the contract price—received by people of color are almost entirely or entirely due to differences in geographies where people, regardless of race or ethnicity, reside. When comparing appraisals for people of color to those for non-Hispanic white people within the same geographies, a new study by the American Enterprise Institute’s (AEI) Housing Center finds that there are no or hardly any differences.

The study, titled “Confirming Alternative Explanations for Appraisal Under-Valuations: New Evidence From Appraisal-Level Data,” authored by AEI Co-Directors Tobias Peter and Edward J. Pinto utilizes newly released, appraisal-level data from the FHFA’s Uniform Appraisal Dataset Appraisal-Level Public Use File, and confirms earlier AEI research, which had reached a similar conclusion.

The study suggests that commonalities in people’s experiences in buying a home (e.g., first-time home buyer status) or local market conditions (e.g., the presence of a market frenzy or seller concessions) are far more important than differences in people’s race or ethnicity when it comes to determining who receives an under-valuation and who does not.

The Uniform Appraisal Dataset (UAD) Appraisal-Level Public Use File (PUF) provides the public new access to a selected set of data fields found in appraisal reports. The UAD Appraisal-Level PUF is based on a five percent nationally representative random sample of appraisals for single-family mortgages acquired by Fannie Mae and Freddie Mac. The current release includes appraisals from 2013 through 2021.

To facilitate further analysis, the AEI Housing Center urges FHFA to expand its appraisal-level dataset to include first-time home buyer status, seller concessions, or loan-to-value ratio. To better measure and document appraiser racial bias, the study also urges FHFA, Fannie Mae, or Freddie Mac to review every appraiser on an individual basis for racial bias and deliberate inaccuracies with input from researchers.

This study is the latest in a series of reports by the AEI Housing Center, which have found serious flaws in widely circulated research of significant and systemic devaluations of black neighborhoods, systemic and large valuation differences in refinance appraisals, and higher mortgage decline rates for minority borrowers.

The goal of the AEI Housing Center is to:

  • Provide transparent and objective mortgage and housing market trends at unprecedented levels of detail.
  • Foster a stable system of mortgage finance that promotes sustainable homeownership.
  • Develop market-based solutions to the nation’s shortage of economical housing.

Earlier this week, the Federal Financial Institutions Examination Council’s Appraisal Subcommittee (ASC) held its third public hearing on appraisal bias, discussing how a residential appraisal is developed and reviewed, the process for reconsiderations of value for residential real estate valuations, and the development of rural appraisals.

To help prevent discrimination in the home appraisal process, the Consumer Financial Protection Bureau (CFPB) has joined other federal agency regulators as members of the Appraisal Subcommittee, which oversees the real estate appraisal regulatory framework for federally related transactions, including monitoring and reviewing of The Appraisal Foundation. Throughout 2023, the Appraisal Subcommittee has conducted a series of public hearings to better understand the challenges and potential solutions related to appraisal bias.

The first-ever public hearing of the Appraisal Subcommittee, which took place in January, focused on understanding the home appraisal system and the root causes of appraisal bias. Witness testimony included homeowners with first-hand experience in receiving an undervaluation of their home, as well as academic research on the causes of appraisal bias. The purpose of the hearing was to keep the spotlight on the issue of appraisal bias, provide information on the role of the Appraisal Subcommittee in the appraisal regulatory system, and receive feedback from key stakeholders and the public.

The second hearing, held in May, focused on appraisal standards, appraiser qualification criteria, barriers to entry into the profession, and appraisal practices. Witnesses discussed the fees associated with obtaining and maintaining appraiser credentials, and The Appraisal Foundation’s overall lack of transparency and regulatory guardrails.

Click here to access AEI’s report, “Confirming Alternative Explanations for Appraisal Under-Valuations: New Evidence From Appraisal-Level Data.”

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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