The Biden administration unveiled a five-point plan Wednesday to reduce racial bias in home lending and appraisals.
The Property Appraisal and Valuation Equity Plan calls for federal agencies to use their existing oversight to enhance accountability of the appraisal industry and empower homeowners and buyers to take action when they receive a valuation they consider unfairly low.
“For generations, millions of Black and brown Americans have had their homes valued for less than their white counterparts simply because of the color of their skin or the racial makeup of the neighborhood,” said Department of Housing and Urban Development Secretary Marcia Fudge, who helped lead a task force that developed the proposal.
“Black and brown homeowners in communities just like mine have not felt that they have had a voice or that the Federal government was doing enough to redress the issue of racial bias in the appraisal process.”
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Studies have shown that homes in Black neighborhoods are, on average, found to be valued at 23 percent less than homes in neighborhoods with no or very few Black residents, which works out to an average undervaluation of $48,000.
The appraisal industry for years pointed out that its assessments are based largely on comparable sales, meaning the market, not biased appraisers, were responsible for the discrepancy.
However, pressure mounted on the industry after the killing of George Floyd and anecdotal reports of appraised values increasing when homes were stripped of evidence of having housed Black people.
In one case, a Black couple’s home value was increased by $500,000 after they took down family photos.
The Appraisal Institute, an appraisal trade group, last year acknowledged the need to address racial bias.
The HUD plan consists of five actions, each broken down into components. Step one is to strengthen guardrails against discrimination by ensuring appraisers have clear guidance of anti-discrimination obligations under federal laws, as well as making it easier to appeal valuations. The step also calls for strengthening appraisal data.
The second step involves strengthening accountability in the industry when it comes to fair lending and housing. The task force recommended strengthening enforcement agencies and expanding examination procedures of mortgage lenders to find patterns of appraisal bias.
The task force also laid out steps to diversify the appraisal workforce — which at 97 percent white is among the least diverse industries — in part by reducing the cost and burden of becoming an appraiser. The plan also calls for increasing consumer education about bias and launching a public awareness campaign on the subject.
Appraisals are important components of mortgage lending and refinancing. The higher the appraised value, the more the owner can borrow against the home, all else being equal. The appraised value therefore plays a role in what homes sell for, if the buyer is applying for a mortgage to make the purchase.
But low appraised values in Black neighborhoods also make their homes more affordable, which can benefit Black buyers.
“The initiatives announced today are critical to eliminating racial bias, improving appraisal accuracy, and opening access to more affordable, sustainable homeownership opportunities for minority borrowers,” said David Dworkin, president and CEO of the National Housing Conference, in a statement. “Accurate and fair appraisals are the foundation of sound mortgage underwriting and sustainable mortgages that equitably serve all Americans.”