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Discrimination in Appraisals
by Isaac Peck, Editor
Discrimination and racism in appraising is a hot-button conversation across the industry of late. Here are the issues.
It all started in early 2020, when candidate Joe Biden issued a Housing Plan that took aim at “racial bias” in the appraisal community. This, the plan argued, led to homes in communities of color being “valued at tens of thousands of dollars below majority-white communities even when all other factors are the same.” Biden’s plan called for a “national standard for housing appraisals that ensure appraisers have adequate training and a full appreciation for neighborhoods and do not hold implicit biases because of a lack of understanding.”
Biden also cited a report by the Brookings Institution, The Devaluation of Assets in Black Neighborhoods, which concludes that majority-black owned neighborhoods and communities are devalued compared to non-majority black neighborhoods. The Brookings report notes that “Homes of similar quality in neighborhoods with similar amenities are worth 23 percent less ($48,000 per home on average, amounting to $156 billion in cumulative losses) in majority Black neighborhoods, compared to those with very few or no Black residents.”
Appraisers, of course, were quick to point out that they already have a set of national standards called the Uniform Standards of Professional Appraisal Practice (USPAP), and that they are already required to perform their roles in an unbiased and objective manner. And that the old saying is accurate: appraisers report the market; they don’t make the market.
However, the story doesn’t end here. After Biden’s proposal, several national newspapers published articles that repeated the allegations of discrimination within the appraisal industry and urged that “action be taken.”
Here’s a closer look at the developments around this controversial issue.
The tongue-in-cheek response from many appraisers when Biden proposed “national appraisal standards” was quite predictably: “Ever heard of USPAP?” But the conversation goes a little deeper than that. Both the Appraisal Institute and the National Association of Appraisers issued letters to Joe Biden and his team in an effort to explain why the portion of his plan targeting the appraisal industry is, perhaps, a little misguided.
Craig Morley, the 2020 President of the National Association of Appraisers, argued that appraisers are already bound by USPAP and that “there is no need for any additional national standards for appraisals or appraisers,” explicitly rejecting the insinuation that “home values in any neighborhood are the results of racial bias among appraisers.”
Morley quotes USPAP at length to make his point, specifically the Conduct Section of the Ethics Rule which states that an appraiser:
• must not perform an assignment with bias.
• must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.
Morley goes on to cite the Appraiser Independence mandates, from section 129E of the 2010 Dodd-Frank Act, which he points out already addresses the issue of lender pressure on appraisers, which Biden also seems concerned with.
Jefferson Sherman, the 2020 President of the Appraisal Institute (AI), also wrote a letter to Biden’s campaign, arguing eloquently against the idea that appraisers are the “culprit,” writing: “To be quite frank, the assertion that appraisers would systematically undervalue or overvalue real estate due to these [racial] factors is absurd and shows a profound misunderstanding of the real estate valuation profession… It also should be noted that appraisers do not make the market. Instead, we reflect buyer and seller behavior in real estate. Appraisers do not evaluate individuals or borrowers; rather, we analyze properties and property markets,” the AI President said.
(story continues below)
Fair Housing Education
One of the reasons Biden’s campaign originally called for national appraisal standards was so that appraisers can be “adequately trained, understand the neighborhoods in which they work and [be] free of bias.” While some appraisers are offended at the prospect of fair housing education, there are those in the industry who argue that change is absolutely necessary. In September 2020, The Appraisal Foundation (TAF) President David Bunton seemingly agreed with Biden, writing that “recent tragedies across our nation have highlighted how much more work we need to do to combat systematic racism in the United States, and that extends to the housing industry.”
TAF consequently signaled that it is taking a variety of actions to support diversity and fight discrimination, including “modifying education requirements for current and aspiring appraisers to include specific content to address bias, discrimination, or fair housing issues in appraisal,” among a litany of other initiatives centered around fair housing.
“While The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP) has specifically prohibited discrimination since the first writing in 1989, it is clear that we must do more,” Bunton writes.
Several state legislatures quickly heeded the call, with New York law 19 NYCRR § 1107.2. being amended to require all licensed/Certified appraisers to “successfully complete an approved course of study in Fair Housing and Fair Lending” every two years in order to renew their licenses.
California is also rumored to be considering a bill that would require five hours of “fair housing” continuing education for appraisers every renewal cycle.
This call for “re-education,” not surprisingly, has offended many appraisers. National appraiser blogger Dave Towne argues that a “separate multi-hour required course EVERY license cycle,” which is currently being proposed by several states, is “overkill.” Towne is careful to add that he is not saying that additional education about the topic is unimportant, but wonders aloud whether other states will jump on the “blame/punish culture bandwagon.”
In lieu of educational changes, Illinois is currently considering a bill (HB 5862) that would create a “private right of action” against any appraisers or real estate agents who provide an opinion of value that is allegedly discriminatory. In other words, the consumer public would have a right to sue appraisers for any alleged discrimination under the bill.
This might significantly increase appraisers’ liability as they could potentially be liable to both buyers and sellers if discrimination is alleged. Currently, most clients are banks—making it more difficult for buyers and sellers to bring a lawsuit against the appraiser because they have no contractual relationship with the appraiser. By creating a private right of action, the Bill could allow a buyer or a seller to bring lawsuits against appraisers and other real estate professionals for the alleged discrimination. The bill also “provides for professional discipline of brokers and appraisers who engage in discrimination.” It remains to be seen if additional states will follow Illinois’ lead.
One important point to note is that the Fair Housing Act does not require that the discrimination be intentional. In 2015, the U.S. Supreme Court upheld the “disparate impact” section of the Act. This means that a plaintiff need not prove intentional discrimination, the plaintiff only needs to prove that a defendant’s policies and practices have an adverse impact on members of a protected class. This has the potential to create a great deal of liability for appraisers.
Certain E&O programs that specialize in coverage for real estate appraisers have been proactive about discrimination liability and have included coverage. OREP’s appraiser E&O policy, for example, now includes $100,000 in coverage for any claim brought against appraisers alleging discrimination. “It’s another bit of included protection for our insureds and one less thing they have to worry about,” said David Brauner, OREP Senior Broker. Not every OREP policy includes the coverage, so please ask your OREP agent before binding your coverage.
Much of the discussion regarding discrimination and fair housing practices in the appraisal industry seems to be taking place within the industry and between the industry and politicians/regulators. However, a series of national news stories subsequently brought the conversation into the public eye.
In August 2020, the story of Abena and Alex Horton was picked up by the New York Times, Good Morning America, and dozens of other national newspapers and TV stations. As the Times reports, the Hortons lived in Jacksonville, FL and were looking for an appraised value of around $450,000 when they went to refinance their house. The first appraiser appraised the home at $330,000. Feeling wronged, the Hortons appealed the appraisal with the lender and sought to get a second appraisal. Horton, who is African American, says that she suspected discrimination in the first appraisal and decided to take down all family photos and holiday cards that included nonwhite persons. Ms. Horton left up pictures of her white husband, his white family, and other holiday cards “showing white families.” The second appraisal subsequently came in at $465,000.
In a widely circulated Facebook post, Horton decried what she saw as clear discrimination that prevents black communities from building wealth, writing: “Racism silently but conspicuously steals wealth. Racism wastes time. Racism raises blood pressure. Racism makes me hate myself for my calm acceptance of what I had to do, and have always had to do, to achieve a fair result. I write this from a place of absolute anguish, to sort through my emotions. I want better for my son.”
Horton’s post received over 3,000 comments, with other black homeowners sharing similar experiences. After taking down family pictures and having a white neighbor stand in for him, Stephen Richmond, in Hartford, Conn. says that he saw his appraised value increase by $40,000.
Appraisers also commented on Horton’s post, urging her to file a state board complaint against the first appraiser and asking her to make public both appraisals in question. One appraiser acknowledged the possibility of discrimination, writing: “I am an appraiser and this is going around our discussion boards and most of the appraisers don’t want to admit this could be true. Because it is illegal to do this, they act like it can’t happen. But this doesn’t surprise me at all. I have seen some bad appraisals and in many areas. Appraising is subjective which allows for implicit bias.”
Other appraisers proffered that perhaps the first appraiser was simply incompetent, not racist. Others accused Horton of playing the “race card” and pointed out even if she had left her pictures up on both appraisals, the two appraisers still might have disagreed widely on the value.
One interesting twist that appraisers have been quick to point out is that Abena Horton is currently the Assistant General Counsel & Vice President at Black Knight, a provider of integrated technology, data and analytics for lenders and mortgage services. Black Knight also provides, you guessed it, Automated Valuation Models that provide an opinion of value for real estate. As a potential competitor to appraisers, some appraisers have publicly wondered if Black Knight has a vested interest in seeing such a controversial story about appraisers hit the national news circuit. However, since the Hortons story became public, at least three other non-white homeowners with similar stories have come forward to allege a white appraiser discriminated against them. These stories were subsequently picked up by the New York Times, Denver News Channel 7, and the Chicago Sun-Times, among other news outlets.
The American Enterprise Institute (AEI), a Washington D.C. think-tank focused on the housing industry, recently wrote a letter to the Federal Housing Finance Agency which addresses appraisal waivers (see Appraisal Waivers: The Future is Here) as well as the issue of discrimination in appraisals.
AEI addresses four recent examples of alleged racial bias in appraisals, including the case of the Hortons and Mr. Richmond explained above. AEI has state of the art data sorting and analysis capabilities, as well as great visibility into the data that is currently public regarding all of Fannie Mae and Freddie Mac’s (the GSEs) loans, waivers, appraisals, and more.
Using a big data approach, AEI conducted a study that looked at whether “the alleged practices of intentional racial bias, along with unintentional bias, are common or uncommon.” Using data from 243,000 valuations, including 59,000 “appraisal waivers” from the GSEs, the AEI used its own AVM in combination with the data to determine if there was a value difference (or a gap) between refinance loan appraisals for blacks and whites, in order to evaluate the existence of bias, especially as it relates to the alleged practices.
In its letter to FHFA, the AEI ultimately concluded the following: (i) contrary to media allegations, racial bias by appraisers on refinance loans is uncommon and not systemic (ii) a claim of unintentional bias on refinance loans, if to be used as the basis of a disparate impact claim, was also found to be uncommon and not systemic, (iii) appraiser bias cases, such as cited by the media, may well result from “bad apple” appraisers or incompetence.
With the Biden administration’s focus on fair housing, TAF’s new diversity initiatives, and a renewed interest among state legislatures to address the topic, appraisers can likely expect further discussions, education, and even liability around this issue in the coming months and years. Now that this issue is also squarely in the public eye, it’s quite possible that we will soon see more cases of alleged victims of discrimination take to the press, file state board complaints, or bring lawsuits against appraisers. Stay safe out there!
About the Author
Isaac Peck is the Editor of Working RE magazine and the Vice President of Marketing and Operations at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states. He received his master’s degree in accounting at San Diego State University. Reach Isaac at firstname.lastname@example.org or (888) 347-5273. CA License #4116465.
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