Stakeholders detail their progress on combating appraisal bias

Stakeholders looking to curb appraisal bias report some progress in using technology and training diverse candidates, but the field still requires a massive overhaul, they said.

Numerous studies show evidence of appraisal gaps, or a difference between the amount of appraisals below expected valuations between white and minority borrowers. The White House in March announced a task force to address the issue also alleged by black borrowers who've recounted stories of "whitewashing" their homes to gain higher valuations. 

The appraisal industry's self-policing hasn't worked and stakeholders outside of the field need to encourage best practices to rein in instances of bias, experts said Tuesday during Housing Finance Strategies' HousingDC22 digital event. 

"Fair housing and anti-bias training, again, this has to be required," said Melody Taylor, executive director of the White House's Property Appraisal and Valuation Equity task force. "This has to be infectious in every Wells Fargo, in every Bank of America, in every Chase, in all companies and corporations that have a hand in the home buying process."

The field is cited as one of the least diverse in the real estate industry, with nearly 98% of appraisers white, almost 70% of them male and a median age of 50, according to the Bureau of Labor Statistics. Lengthy, labor-intensive apprenticeships for incoming appraisers and heavy bureaucracy also frustrates many already in the profession.

Studies on the issue have produced varying results on the extent of appraisal bias, but extensive research by the government-sponsored entities indicates there are gaps between home valuations for white and minority borrowers. Freddie Mac's research is based on approximately 13 million appraisals collected between 2015 and 2020 and leveraged prior research from sources like the Philadelphia Federal Reserve, said Michael Bradley, Freddie Mac senior vice president of modeling, econometrics, data science and analytics in the Single-Family Division. 

"Even after controlling all factors that explain home prices for appraisal practices, there definitely still is a difference in the appraisal practices in black and Latino neighborhoods, the tracts, or for black and Latino borrowers," he said. 

Officials and company representatives said Tuesday that they've made some inroads in appraiser diversity by way of both grant funding and direct hiring. In Mississippi, 17 diverse appraisers graduated from a pilot program funded by approximately $3 million from the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. Other states are eying the program, which has been a boon to Mississippi where some counties report having zero appraisers, Taylor said.

Wells Fargo, in its own biannual training and hiring of appraisers, counted 24 of 25 full-time employees diverse in some measure of protected class, different than the overwhelmingly white industry, said Jud Murchie, diverse segments, representation and inclusion national research relationship manager at the bank. 

"It's a start, but it's an example of how we as a lender and other our peers are doing similar things where we're able to get the levers that we have access to to be able to influence the diversity in this industry," he said. 

The Association of Appraiser Regulatory Officials is trying to encourage every state to implement mandatory training for fair housing and appraisal bias for every appraiser in every licensed cycle, said Cristy Connolly, executive vice president of valuation modernization at Class Valuation, an appraisal management company. Depending on the state, implementing the training could take two to three years, she said.

Experts suggested other, easier-to-implement changes to avoid instances of bias. An internal Wells Fargo group studying home valuations is vetting disclosures for consumers including explaining the appraisal process and its legality, Murchie said. PAVE has also suggested housing stakeholders analyze and issue guidance around reconsideration of value, or ROVs, an option for borrowers to address any perceived loss of wealth during purchase or refinance transactions. 

Another tool to mitigate bias involves 3D scanning technology, in which a specialist uses a tripod and camera phone to take a 360-degree scan of a property's interior and exterior. The method reduces the chances of human error by replicating standard images of a property that can be accessed by various stakeholders in the mortgage process, including secondary investors, Connolly said. 

Algorithms and automated valuation models, despite their own imperfections, remain a positive tool for reducing bias because they are easier to check for bias, Bradley said.

A reshaping of the industry's sales comparison approach could be a significant gamechanger, said Lisa Rice, president and chief executive officer of the National Fair Housing Alliance. The homeowners insurance industry used to rely heavily on market value appraisals to set premiums and determine eligibility but now relies on home reconstruction cost estimates, she said. 

"This has really helped to lessen discriminatory outcomes in the appraisal space," said Rice. "I think we need to do something similar so that we see the same kind of result in the home lending space."