The Faulty Appraisals and Assessment Gap: A Recap of the Panel on Racial Inequalities in Home Appraisals and Assessment

Presented at the ABA RPTE Section’s 2022 Spring CLE Conference

By: Jonathan M. Bogues1

In this piece, Jonathan Bogues provides an overview of a recent Section program detailing the continuing race-based inequities in residential real estate valuations.

Over the last few years, we have seen an exorbitant rise in the residential real estate market with median home prices rapidly increasing across the country. To some, this has been a good thing with several homebuyers taking advantage of the equity and wealth built during their home ownership. However, this growth has not been felt by all.

For instance, Paul Austin and his wife, Tenisha Tate Austin, an African American family, purchased their first home in Marin City, CA in 2016. During their ownership, the Austin family made several home improvements and renovations to the property such as adding a deck, fireplace, new appliances, and an entire new floor adding more than 1,000 square feet of space. After the renovations, the Austin family had their home appraised. Despite the renovations totaling $400,000, the Austin’s home only appraised for $100,000 more than what the home had previously appraised for.

As such, the Austin family were astonished and were approved for a second appraisal after raising concerns with their lender. However, the Austin family felt something was off and their faulty appraisal may have been motivated by race. So, the Austin Family “whitewashed” and enlisted help from a white family friend to pretend to be the owner of the property. The Austin’s property appraised for $1,482,000, more than $500,000 or a 50% increase in value.

Unfortunately, the Austin’s story is far from being an outlier. During the ABA’s Real Property Trust & Estates 34th Annual National CLE Conference held this past March, many facets of home appraisals were thoroughly discussed during the Faulty Appraisals and Assessment Gap: Racial Inequalities in Home Appraisals and Assessment program. The program panel was comprised of several professionals from various fields within the real estate industry and more specifically, the appraisal process, including Kenneth (Kenny) Jefferson, of Holland & Knight LLP, Timnetra Burruss, of the Cook County Board of Review, William Garber, of the Appraisal Institute, Sehar Siddiqi, of the National Association of Realtors, and Morgan Williams, of the National Fair Housing Alliance.

To start the program, the panelist discussed the general use of appraisals in the home buying process. Appraisals are mainly used to assist lender’s in understanding their risk. In the consumer context, appraisals help with negotiations in real estate transactions.

While the Fair Housing Act was meant to protect against discrimination during the home buying and selling process, as evidenced with the Austin family and several others, issues with inequity in home ownership is prevalent. Previously there was a concern of overvaluation or inflated appraisals; however, the concern now is under-appraised property and how that impacts borrower’s certain classes and potential disparate impacts.

Generally, the undervaluation of appraisals is typically felt by minorities, mainly Black Americans. Panelist Sehar Siddiqi, the previous Director of Federal Housing Policy and Valuation with the National Association of Realtors and current Associate General Counsel for Fannie Mae, stated that the path to home ownership is much more difficult for minorities due to factors such as lack of funds and generational wealth to come up with sufficient funds for exorbitant down payments and may not have previous home ownership to tap into. Siddiqi further stated that data provided by the National Association of Realtors shows the home ownership gap between Black Americans and other Americans is larger than it was in 1960 and Black families have one-tenth of the wealth of other demographics, both of which is primarily tied to wealth accumulation from home ownership.

Appraisers serve as objective and unbiased third parties in transactions; however, there has not been enough emphasis on biases in the appraisal process. As such, the Appraisal Institute is leading an initiative to address this. Panelist William Garber, Director of Government and External Relations for the Appraisal Institute, stated the Appraisal Institute as well as the appraisal industry as a whole has an educational initiative to help provide guidance and context as well as help provide appraisers a look at different biases that impact the appraisal process and valuation space. Garber discussed a three-prong approach to addressing biases. First, when dealing with explicit bias or blatant discrimination, it is prohibited, illegal, and more of an enforcement issue for the Fair Housing Act to address. Regarding implicit or unconscious bias, while we all have the potential to have our unconscious biases, this can be addressed through education and awareness, which the Appraisal Institute aims to remedy by helping appraisers identify and breakdown unconscious biases. Last, there is structural or systemic bias such as racist restrictive covenants and redlining to name a few. However, appraisers should be aware of systemic biases because it does impact real estate markets that appraisers operate in as well.

There are a few solutions on the table to address the issues discussed during the presentation. President Biden has created the Inter-agency Task Force on Property Appraisal and Valuation Equity (PAVE). The PAVE Task Force is comprised of leaders from the White House Domestic Policy Council, U.S. Department of Housing & Urban Development, the Appraisal Subcommittee of the Federal Financial Institutions, the Board of Governors of the Federal Reserve System the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Association, Office of the Comptroller of the Currency, the U.S. Department of Agriculture, the U.S. Department of Justice, U.S. Department of Labor, and U.S. Department of Veterans Affairs. The PAVE Task Force’s chief objective is to (i) evaluate the causes, extent, and consequences of appraisal bias and (ii) establish a transformative set of recommendations to root out racial and ethnic bias in home valuations.

The PAVE Task Force has committed to strengthening protections against discrimination in residential valuations; enhance enforcement of the Fair Housing Act and drive accountability in the appraisal industry; create a well-trained and diverse workforce of appraisers; empower and provided consumers with necessary information to take action against bias; and provide researchers and enforcement agencies with improved data to study and monitor valuation bias.

Along the same lines of the PAVE Task Force, the Appraisal Institute has entered a partnership with Fannie Mae, Freddie Mac, and the National Urban League to create a scholarship program to help minorities enter the field, tackle the education piece, and to alleviate costs associated with entering the field as the appraisal industry is predominantly comprised of older, white males at the moment.

In light of several instances of faulty appraisals, appraisal review has emerged as a new discipline within the appraisal industry. Appraisal Review is a form of auditing appraisals and has increased over the last ten years or so with several books, courses, and literature being published on the matter. As such, the Appraisal Institute published an “Art of Appraisal Review” textbook to be used by the lending community. The “Art of Appraisal Review” was written by a former chief appraiser and edited by a team of appraisers. There is also a series of courses developed around the textbook “Theories of Appraisal Review” and “Procedures of Appraisal Review” as well as case studies for appraisal review available at the AppraisalInstitute. org. Legitimate concerns of appraisal review turning into appraisal shopping was raised during the presentation. Siddiqi and Garber both spoke on the appraisal review process for VA loans being emulated for other loan programs as the VA loan process already incorporates a reconsideration of value process. The VA’s reconsideration of value process involves certain limitations on consumers that does not allow consumers to continually have their home reappraised until a desired outcome is achieved while also addressing any inaccuracies with the appraisal.

The Appraisal Institute website also includes a “Find an Appraiser” function to find appraisers that can serve as expert witness that can be involved in any litigation matters or litigation support as well as finding an appraiser based on demographics (minority appraisers, women appraisers, etc.).

To conclude, while racial inequities in home appraisals have been an issue for quite some time, there has been tangible steps taken to rectify these inequities; however, there is still work to be done on this front.

Endnotes

1. Jonathan M. Bogues is an Associate in the Raleigh, North Carolina office of Michael Best & Friedrich LLP, 3700 Glenwood Avenue, Suite 240, Raleigh, NC 27612 (Jonathan Bogues - Michael Best & Friedrich LLP).

SUMMER 2022 eReport