Appraisals: A Missing Link in Fair Housing/Fair Lending Debates

Once again those families and communities that have long been and continue to be subject to discriminatory (and often predatory) behavior, pay a high price. But so do many who have not traditionally been victimized by these practices.
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While the appraisal industry has a long, sordid history of discrimination, and such bias still creeps into almost every step of the property assessment process today, it has been virtually invisible in recent fair housing and fair lending debates (See Bill Pittinger's 2013 paper "Managing the Appraisal Component of Fair Lending Compliance" from the ABA Bank Compliance Magazine ). And once again those families and communities that have long been and continue to be subject to discriminatory (and often predatory) behavior, pay a high price. But so do many who have not traditionally been victimized by these practices.

In fact, discriminatory appraisals often punish some institutional actors who have long been engaged in their own wrongful behavior including mortgage lenders and real estate agents who generally depend on accurate appraisals to do their work. Ironically, these costs are created by both arbitrary under-appraisals and strategic over-appraisals. These problems can be mitigated by a combination of recruitment, training, and enforcement actions.

When properties have been under-appraised, deals entered into by willing buyers and sellers for more than the low appraisal cannot go through. Those buyers and sellers lose out as do the real estate agents, mortgage lenders, and home insurers who attempted to close the deal. But so do area residents whose home values are depressed by such systematic under-appraisal and its adverse effect on those markets. Opportunities to accumulate wealth are undercut as properties are devalued (See Errol T. Louis's 1997 article "The Price is Wrong: Appraisal 'Redlining" Understate Millions in Community Assets," Shelterforce Online May/June. ).

More recently, when subprime lending leading to the foreclosure crisis was peaking, the opposite problem occurred. Real estate agents, mortgage originators, and others in the home sales pipeline pressured appraisers to come in with numbers to meet the inflated price buyers and sellers agreed to even when objective analysis indicated the homes were not worth the agreed upon price. Appraisers who did not meet the price often lost business with those lenders who simply wanted an appraisal that would permit the deal to go through even at the artificially high price. Just before the housing bubble burst, 90 percent of appraisers in a national survey reported they were pressured by real estate agents, lenders, and consumers to increase their valuations (See Ken Harney's 2007 Washington Post column "Appraisers Under Pressure To Inflate Values." In many cases appraisers did meet the number so the deals could go through only to result in foreclosure a few years later.
A common element in both the under- and over-appraisal phenomena is that these practices were concentrated in minority neighborhoods. Compounding these problems has been the fact that the appraisal industry has had relatively little inexperience with, and simply does not know how to value property in, non-white communities.

This was demonstrated by the Appraisal Process Task Group, created by the Cleveland Federal Reserve Bank in 1994, when it asked four different appraisers to appraise the same property in the predominantly black Hough neighborhood of that city. The appraisals varied from $36,000 to $83,500. Regardless of whatever the property was worth, this experiment suggested that the appraisal industry was not able to fairly and objectively develop valuations for properties in this community.

Several factors could account for these results. There may be few "comps" (similar properties in the same neighborhoods) in this area that would facilitate more consistency in the appraisals. Perhaps there were few appraisal firms that knew the community so suburban appraisers had to be brought into the test who were unfamiliar with the area. Whatever the explanation, one consequence is another factor that makes it more difficult to sell homes in an African American community leading to lower property values and wealth accumulation for area residents.

It is time to replicate this research. A provocative and likely enlightening test would be to have a select group of firms appraise properties in an African-American community and other similar properties in a white neighborhood in several metropolitan areas. Ideally these would be homes that have sold recently so there is some reasonably reliable estimate of the market values of the properties. The issue would not be which home was valued more highly (homes in white neighborhoods are almost always valued more highly than similar homes in non-white communities) but rather the consistency of the appraisals and how closely the appraisals matched the recent sale price. That is, the variation in appraisals rather than their average valuation would be of interest. If there was significantly greater variation in the appraisals in the African American neighborhood than in the white neighborhood, that would constitute strong evidence of at best arbitrary, and more likely, discriminatory treatment of the former. Assuming the recent sale price of these homes reflected their true market value, it would also be possible to assess the extent to which properties are over- or under-appraised in different neighborhoods.

Such tests would likely require the assistance of a financial institution. They are the entities that generally commission an appraisal. But some lenders have entered into cooperative arrangements with fair housing advocates. And presumably they would perceive a self-interest in eliminating such randomness, if not discrimination, from the appraisal process in order to assure that their borrowers can afford the loans. This would particularly be the case where originators must retain some "skin in the game" as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

What could be done if the findings revealed ongoing problems? One policy implication would be to encourage lenders to use local appraisers when they are available since they would presumably know the neighborhoods better than more distant suburban appraisers. A longer term recommendation would be for real estate agents, lenders and appraisers to work with their trade associations and local educational institutions to train more local residents to enter this business. In those cases where appraisal firms consistently engaged in such practices and refused to take corrective action, sanctions could include fines and, in particularly egregious cases, terminating their license and prohibiting them from engaging in this business.

Arbitrary and discriminatory appraisals are costly to many communities and many housing and related financial service industry providers. Artificially high or low appraisals can be equally devastating. We know there are costs, but we have little sense of how steep they are. It is time to find out.


Gregory D. Squires is a Professor of Sociology and Public Policy & Public Administration at George Washington University and a member of the Board of Directors of the National Housing Institute

Note: A version of this essay appeared on the National Housing Institute's blog "Rooflines" on July 1, 2014.

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