» Discrimination in Appraisals

5


The Appraiser Coach

“One of the best courses that I have had in 17 years!” -Amy H

>> OREP E&O
★★★★★
They are knowledgeable,
professional, and understand
urgency.” – Joe Thweatt

 

Editor’s Note: Your opinion needed—take the Driving Comparable Sales 2021 Survey online now.

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.

National Standards
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)

NE-InsuranceAd-1.jpg

(story continues)

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.”

Liability
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.

(story continues)

Driving Comps Sales Survey

(story continues)

National News
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.

Statistical Sampling
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.

Conclusion
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 isaac@orep.org or (888) 347-5273. CA License #4116465.

 

 

Tips for Smoother Appraising

CE Online – 7 Hours (45 states)
How to Support and Prove 
Your Adjustments

Presented by: Richard Hagar, SRA

Must-know business practices for all appraisers working today. Ensure proper support for your adjustments. Making defensible adjustments is the first step in becoming a “Tier One” appraiser, who earns more, enjoys the best assignments and suffers fewer snags and callbacks. Up your game, avoid time-consuming callbacks and earn approved CE today!

Sign Up Now!  $119  (7 Hrs)
OREP Insured’s Price: $99


>Opt-In to Working RE Newsletters

>Shop Appraiser Insurance

>Shop Real Estate Agent
Insurance


Send your story submission/idea to the Editor:

isaac@orep.org

 

 

 

Tags:

Comments (5)

  1. by Robert Mossuto

    First, thank you for the information. Yet another instance in which the appraiser is to blame. We do not dictate neighbor sales (sales price). We do use that data though. But now it’s our fault sales prices are lower in some neighborhood than in others. But we never saw any study or review data regarding the two appraisals in question on the Horton home. A review of both appraisals might show a different story! What data was used in each? And, it seems pretty fishy 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 that provides AVM’s.

    Appraisers are regulated to the umpteenth degree already. The Biden administration’s focus on fair housing, TAF’s new diversity initiatives (which they are likely to make money on), and a renewed interest among state legislatures is going to be the death of this profession in the lending arena.

    As it is right now appraisers are turning away work in fear of being accused of racial bias, being black listed by real estate agents for “LOW APPRAISALS”, and the fear of being turned into their state regulator by sellers for not hitting contract price and killing their transaction.

    We have USPAP, and more oversight than many professions, all of which hold us accountable to be unbiased. So, is even more regulation really necessary? Personally, I think not!

    - Reply
  2. The increasingly potential issues we see is not for the faint of heart. I work rural areas, but I have experience similar challenges for years. It may not be race in my area, it might be our local polygamous community, or unfriendly hillbilly neighborhoods! If there are not adequate sales within that neighborhood, then the value range won’t be represented. I can’t adjustment for race, religion, bad neighbors, or any other bias! (end of discussion) If it is my opinion the subject is affected, I just cancel the order for “lack of comparables to write a credible report”. (never an issue) If I try to write a report without adequate data, then I’m truly at fault, and misleading… As independent contractors we are in control of the jobs we tackle. In those neighborhoods affected by issues, I let the nearby comparables speak for themselves. If they aren’t available, then I walk. Sometimes as professionals, we just need to make a business decision to stay out of controversy / harassment. Just the cost of business!

    - Reply
  3. JOKE BIDEN IS AN IDIOT – HAS NO IDEA ABOUT APPRAISALS – FOR SOME REASON HATES WHITE CONSERVATIVE PEOPLE. MOST OF THE PROBLEMS ARE CAUSED BY LIBERAL/DEMOCRATIC WHITE GUYS/WOMEN WHO THINK THEY ARE ALL KNOWING.

    - Reply
  4. Great article! Thanks for digging into these stories further. I was not aware of all the details surrounding the “undervalued” appraisals. Sadly, the truth wasn’t shocking enough to reach the national headlines.

    - Reply
  5. This is a squeaky wheel that is getting a lot of attention, but doesn’t need any grease, and is nothing more than “progressive” politics in action. To the folks that want to make this an issue, it is only another industry that politicians want to control with whacky race based policies, that “project” a bias that rarely exists. Does any appraiser know another appraiser that wakes up in the morning saying “I think I’ll knock down the value of this house today because of the racial makeup of the borrower?” The projection comes in the notion that any bias is unconscious to the appraiser. There could be a variety of reasons that could cause one appraisal to come in higher than another. Experience, and if experience is lacking, good mentorship, of less experienced appraisers is needed to be sure. I have frequent discussions with several younger appraisers myself about a variety of appraisal and market topics. Comp selection is key, as is understanding your market and where you are in a particular cycle. In Austin, Texas, where I’ve been an appraiser for well over 30 years, the market currently requires aggressive valuations no matter what neighborhood you happen to be working in. We have no supply, and off-the-chart demand, with offers between 10-30% above list price. Markets that have high supply and depressed demand typically require more conservative valuations; we all know that. A well written report is key to increasing the reliability of your report, and making yourself law suit proof (although none of us are immune to lawsuits). Clear commentary must be made in your report as to why you chose the comps you did, and why you made the adjustments you made, and should obviously relate directly to the features of your subject property. I also put in extensive comments pertaining to market conditions dating back 24 months. Data from 3-6, or even 12 months ago may not be enough to draw any conclusions about a market trend. We can do better in the sense of more clarity in our work product; specific bias training is not needed. This attempt to control is happening in the military, the press, sports, entertainment, etc. Wake up appraisers, you’re being artificially moved by outsiders to be “woke.”

    - Reply

Leave a Reply

Your email address will not be published. Required fields are marked *