Cashed out: Nonwhite homeowners denied access to refi bonanza

Discrimination denies nonwhite homeowners access to refinancing bonanza

(Photo-illustration by Paul Dilakian)
(Photo-illustration by Paul Dilakian)

What’s a whitewash worth? In the case of Indiana homeowner Carlette Duffy, about $150,000. For Marin County, California, couple Tenisha Tate-Austin and Paul Austin, it’s $500,000. 

After appraisers undervalued their properties, the Black homeowners “whitewashed’’ them — by having white friends stand in for them and replacing family photos with pictures of white people — and tried again with a new appraiser. The appraised value of Duffy’s home doubled, while the Austins’ jumped to $1.5 million from about $1 million in the first assessment. 

Cases like these are shining a spotlight on discrimination in the appraisal industry. Last summer, the Biden administration launched the Property Appraisal and Valuation Equity task force led by Housing and Urban Development Secretary Marcia Fudge and former United Nations ambassador Susan Rice. A report is expected in the next few weeks.

What’s clear is that homeowners whose properties were undervalued by appraisers were locked out of one of the most lucrative refinancing opportunities in history. With mortgage costs falling to below 3 percent after the Federal Reserve started cutting rates to stimulate the economy and support the mortgage industry, the stakes have never been higher for homeowners. For Americans, homes are the greatest store of family wealth and the biggest source of indebtedness. 

Refi riches

Discriminatory appraisals have denied some nonwhite pandemic-era homeowners a chance to take cash out of their homes and cut monthly payments. Although lawsuits such as Duffy’s and the Austins’ are increasing, they represent a small percentage of appraisals in which racial discrimination was revealed by whitewashing.

Homeowners overall tapped more than $70 billion of home equity via cash-out refis in the third quarter alone and more than $340 billion since the start of the pandemic, according to Black Knight’s Mortgage Monitor. Now, with mortgage costs expected to rise, that window is closing. 

“We’ve heard time and time again that the pandemic only exacerbated existing disparities and inequalities, and that is certainly true in the housing market,” said Andre Perry, senior fellow at the Brookings Institution. 

Perry, who is the author of “Know Your Price: Valuing Black Lives and Property in America’s Black Cities,” called much of the response to the pandemic “colorblind” and said it continues to prevent Black people from taking advantage of the same pandemic relief as their white counterparts, including the ability to refinance at the lowest mortgage rates in history.

“It’s fair to say that there is an uneven recovery for Black Americans, mostly because of [the industry’s] refusal to deal with past and present inequalities,” Perry said.

Discriminatory appraisals are only the latest hurdle in a long history of racial bias in the real estate industry. The history — from participating in “redlining’’ to keep minorities out of certain neighborhoods, to opposing the Fair Housing Act of 1968, which barred discrimination in home sales — is so ugly that the National Association of Realtors issued an apology in 2020 for decades of racist policies that prevented nonwhite people from owning homes. 

Homeownership inequality

The consequences persist: As of the third quarter of 2021, the homeownership rate of non-Hispanic white households was 74 percent. This stands in stark contrast to Black households’ 44 percent, according to the U.S. Census Bureau. 

Fixing the problem should start with lowering the barriers to entry for the profession, said Cy Richardson, senior vice president for programs at the National Urban League. “If the racial wealth gap is the alpha [and] omega of our work, we’re looking at those vectors that we can influence and impact.’’

About 85 percent of appraisers in the U.S. are white, according to first quarter 2019 data from the Appraisal Institute. About 77 percent of all appraisers are men, and roughly 71 percent are 51 years old or older.

Richardson called on individual firms and proprietors to recruit more young and diverse talent, offsetting testing costs and developing apprentice programs that address what he calls “an embedded cost to compete.” 

The pathway to becoming an appraiser depends on which discipline you’re looking to get into and can vary from state to state. Typically, you need to fulfill education, experience and examination requirements.

The Federal Financial Institutions Examination Council’s Appraisal Subcommittee commissioned an analysis of universal federal requirements in the appraisal process to determine if there’s any inherent discrimination that would limit candidates’ access to the profession, said Appraisal Subcommittee Executive Director Jim Park.

Experience required

The biggest problem, Park says, is the requirement to have up to 3,000 hours of experience before taking an exam. 

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“That experience requires you to find a supervisor. Very few appraisers want to be supervisors,” Park said. “That is a very big reason, I believe, that the appraisal profession is so homogeneous.”

More often than not, the supervisor is someone who’s willing to take on the responsibility of training someone for free, which often means a relative or family friend already in the business, said Park. 

“Just the relationship-building aspect, a lot of Black and brown and younger people aren’t able to have those experiences and conversations because there are structural impediments and barriers,” Richardson said.

And while the Appraisal Advisory Board instituted an alternative virtual method for trainees to build experience without a supervisor, providers developing this program say it won’t hit the market until early this year.

Richardson promoted the idea of white appraisers partnering with trainees with different racial, gendered and geographic backgrounds. He also encouraged funding to go toward test preparation and incentivizing appraisers who mentor the next generation.

It’s something that Fifth Wall-backed startup Aloft already has in the works. Aloft University is a year-long development program for new appraiser trainees who join the company. Trainees take classes and are paired with a senior supervising appraiser who can mentor them. 

And it’s not as though appraisers don’t get anything in return: In exchange for lessons on how to inspect properties and write appraisal reports, trainees help appraisers with their appraisal assignments. 

Most of those trainees are either nonwhite or female, said co-founder Travis Soukup. Between diverse hiring and offering experience at no cost, the startup aims to address the discriminatory issues facing the appraisal industry. It also intends to promote transparency in its appraisal process by sharing its process when determining the value of a property. 

Eliminating subjectivity

“Our goal is to eliminate subjectivity or bias in the process given our appraisals are developed entirely by fact-based and standardized processes,” Soukup said. “We also have internal checks and balances to ensure these processes are adhered to.”

Still, even a better-trained, more diverse next generation of appraisers won’t be enough to make up for the long history of discrimination, thanks to the use of  “comps’’ to compare prices with similar homes in the same area.  

“The problem with that is when you compare homes to others in neighborhoods that have been discriminated against, you effectively recycle the discrimination over and over again,” Perry said. “Diversifying the field won’t necessarily change that.”

One idea is to look into automated systems, which Perry argues have less room for human error. 

“Moving towards valuated systems is not a foolproof solution,” Perry said. But “at the rate these biases are revealed, these automated systems are much more likely to take root.”

Meanwhile, Black homeowners like Duffy and the Austins are taking matters into their own hands by turning to whitewashing.

“Discrimination in the appraisal process is something we’re seeing more and more often,” said Caroline Peattie, executive director of Fair Housing Advocates of Northern California, in a statement. The organization filed the December suit on behalf of the Austins as well as a similar July suit for Cora Robinson, a Black duplex owner in Oakland.

“Not only were there things in the appraisal that were just plain wrong, such as the number of bedrooms and the property classified as rent controlled when it’s not, but the sales comps that the appraiser chose to use were guaranteed to lower the value of my house,” Robinson said in a statement when her case was filed.

Appraisal practices, credit scoring systems, banking systems and other fundamental parts of the process must be dealt with, Perry said. That’s why he’s optimistic about the PAVE task force’s role in reshaping these fundamental components.

For many nonwhite homeowners, the fix will come too late, as interest rates rise over the next year or more to combat inflation, making Black homeowners “sacrificial lambs of the economy,” according to Perry.

Thanks to her whitewashing, Duffy was able to participate in the refinancing bonanza of the past two years and tap the savings in her home equity. With her property valued at $259,000 post-whitewash, Duffy used some of the money she cashed out to buy the home of her late grandmother, who had lived in the neighborhood. 

“Her grandfather built that home at a time when Blacks were left out of the housing market,” said Amy Nelson, executive director of the Fair Housing Center of Central Indiana. “There was a lot of meaning in having that home stay in the family.”

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