By Sheryl S. Jackson
Since the end of 2020, news media reports have alleged racial bias in home appraisals, turning a spotlight on the appraisal process in the housing finance system.
An analysis of 1.8 million appraisals in 2019 and 2020 by Fannie Mae—a government-sponsored enterprise—evaluated the appraisal values of homes owned by Black and White borrowers. The results published in a 2022 research publication titled “Appraising the Appraisal” showed that:
- Black borrowers refinancing their home on average received a slightly lower appraisal value relative to automated valuation models.
- Homes owned by White borrowers were more frequently overvalued than homes owned by Black borrowers.
- Six states, including Georgia, Louisiana, South Carolina, North Carolina, Mississippi, and Alabama, accounted for nearly 50% of the overvalued homes of White owners in majority-Black neighborhoods.
This research conducted by Fannie Mae is part of a larger strategy to gain a better understanding of, and to minimize, appraisal bias. In addition to research, other efforts to reduce opportunities for bias include enhanced monitoring of appraisal quality, increased industry engagement to gain additional perspectives, and improvement of the valuation process.
“It’s central to Fannie Mae’s mission to facilitate equitable and sustainable access to homeownership and we are firmly committed to doing everything in our power to promote racial equity in housing,” said Jake Williamson, Fannie Mae’s Senior Vice President, Single-
Family Collateral Risk Management. “Racial equity includes helping all borrowers receive a fair and impartial appraisal.”
“While Fannie Mae’s longstanding policy explicitly prohibits discriminatory appraisal practices, Fannie Mae’s work to understand and combat appraisal bias is part of our ongoing commitment to identify and knock down barriers to homeownership, as well as part of our strategy to address inequalities in the housing finance system,” said Williamson.
“NAFCU recognizes that property value is a key determinate of borrower credit risk and an important aspect of the mortgage process,” said Aminah Moore, NAFCU Regulatory Affairs Counsel. “NAFCU supports Fannie Mae’s initiative to address and minimize appraisal bias, and NAFCU further supports modernization of the appraisal process and the continued use of technology to assist in removing bias from the equation.”
In 2021, Fannie Mae scanned 14 million appraisals from 2019 and 2020 to determine the extent of appraisers using terms specifically prohibited in Fannie Mae’s Selling Guide. In response to this work, the company took two immediate actions.
- Fannie Mae’s June 2021 quarterly Appraiser Update newsletter featured tips on avoiding bias—or even a perception of bias—in an appraisal report along with a list of potentially problematic words or phrases that might imply demographics influences an outcome.
- Using the Appraiser Quality Monitoring process, Fannie Mae sent feedback letters to appraisers who had a high frequency of findings. Fannie Mae has continued this type of monitoring as an additional safeguard against potential bias, and to track progress on reduced findings.
Other steps Fannie Mae is taking to combat appraisal bias include:
- Increasing the use of alternative-scope property valuation approaches, such as desktop appraisals and hybrid appraisals.
- Building on existing safeguards to detect valuation errors, such as Collateral Underwriter® (CU®), which has a robust set of risk flags and messages for potential overvaluation risk, appraisal quality risk and property eligibility risk. CU routinely undergoes fair lending reviews by Fannie Mae’s Fair Lending team.
- Fostering diversity in the appraiser workforce through the Appraiser Diversity Initiative (ADI), which is designed to attract new entrants to the residential appraisal field and overcome barriers to entry, such as education, training, and experience requirements.
- Continuing to modernize the valuation approach for home loans through the use of data, technology, and process design.
- Enhancing the tools appraisers use to help them more accurately select comparable properties and conduct adjustments, which will strengthen and provide more confidence in the appraisal process and product.
Offering Multiple Appraisal Options
The traditional appraisal process relies heavily on human observations that can be subject to conscious or unconscious bias. Although humans, and specifically appraisers, are still a vital part of the mortgage origination process, modern appraisal methodology involves significant reliance on objective data and can further assist appraisers in producing a more reliable and reproduceable appraisal. As an example, desktop and hybrid appraisals involve significant reliance on objective data and a more “arms-length” process between the appraiser and the homeowner.
Social distancing and travel restrictions due to COVID-19 provided an opportunity for a real-world test of alternatives to traditional appraisals. At the onset of the COVID-19 pandemic (2020–2021), Fannie Mae allowed exterior-only and desktop appraisals for certain loan types to maintain liquidity in the market and to help manage collateral. The temporary flexibility allowed appraisers to use information provided by parties to the transaction (borrower, real estate agents, property contact, etc.).
“The test of alternatives sparked increased adoption and development of innovative technologies in the industry, including virtual inspections enabling homeowners and other third parties to use a smart device to obtain interior photos or video augmenting the property data already collected by the appraiser,” said Williamson.
“Building on lessons learned during the pandemic, we introduced a refined desktop appraisal option in March 2022, broadly available to lenders for certain transactions that meet the following criteria: one-unit property, principal residence, purchase transaction (including new construction), loan-to-value ratio less than or equal to 90% and Desktop Underwriter® loan casefile that receives an approve/eligible recommendation,” said Williamson. Desktop appraisals do not require an appraiser to perform a physical inspection of the property, which removes an opportunity for conscious or unconscious bias, he explained. “Instead, the appraiser relies on third-party data sources to understand the characteristics and details of the subject property. In addition, appraisers may rely on floor plans or imagery generated by third-party applications (commonly known as 3D scans) and information obtained by remote viewing through virtual inspection technologies.”
In situations where the property is more complex or the appraiser doesn’t have all the necessary information from third-party data sources, a physical inspection could be required, which is when a hybrid appraisal can be conducted, said Williamson. “Hybrid appraisals require a physical inspection by a vetted third-party data collector, who then passes the data and information digitally to the appraiser to complete the valuation assessment portion of the appraisal,” he said. “We believe the home valuation process should include a spectrum of options to establish a property’s market value, with the option matching the risk of the collateral and loan transaction. Desktop and hybrid appraisals are two options in that spectrum that range from appraisal waivers to traditional appraisals,” he added.
“To identify potential issues with appraisals—which could include situations of misvaluation—we provided CU to support our quality control processes and resources, as well as serve as a tool to lenders for their quality control and collateral underwriting processes,” said Williamson. “Created in 2011 for internal quality control purposes and then brought to market in January 2015, CU has a robust set of risk flags and messages, including triggers for potential overvaluation risk, appraisal quality risk and property eligibility risk.”
As the use of innovative technology grows, so does Fannie Mae’s commitment to ensure an unbiased appraisal. “To control for risk, we created an additional line of quality control measures to monitor the quality of the appraisal flexibilities,” said Williamson. Although close to 3.5 times the number of appraisal flexibilities were reviewed as traditional appraisals, a similar quality and a similar distribution of risk scores in CU was found, he said. “Feedback from the market on the appraisal flexibilities was generally positive, and the experience was helpful to inform potential enhancements to our standard practices.”
- “Appraising the Appraisal” working paper includes results of Fannie Mae evaluation of 1.8 million appraisals. Go to https://bit.ly/
- June 2021 Appraiser Update includes tips to avoid the perception of bias. Go to https://singlefamily.fanniemae.com/media/document/pdf/appraiser-update-june-2021.