FHFA identifies "thousands" of potential appraisal bias cases

Following a lengthy investigation, the Federal Housing Finance Agency says it has identified thousands of cases of “potential bias” in neighborhood descriptions written by appraisers and used in their home valuation process.

“From millions of appraisals submitted annually, a keyword search resulted in thousands of potential race-related flags,” wrote Chandra Broadnax, senior examination specialist, and James Wylie, an associate director, in an FHFA blog post presenting the findings of its research.

The FHFA said it examined millions of agency property valuations in its investigation. The FHFA is also part of a White House-appointed interagency task force that’s been charged with examining the role of bias in housing inequality. The task force is expected to provide recommendations early next year.

Appraisers are prohibited from advocating for the cause or interest of any party or issue under the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice. In addition, the USPAP states that appraisers should not perform any assignments with bias, and that they must comply with all laws, regulations and applicable client requirements.

The Federal Fair Housing Act has prohibited racial discrimination in appraisals since 1968 and many State’s have their own fair housing laws that disallow racial bias.

Yet, allegations of appraisal bias continue to emerge. Earlier this month, it was reported that a Black couple from San Francisco had filed lawsuit against an appraiser who valued their home at $989,000, barely more than they paid for it, despite spending thousands of dollars to upgrade the property. The couple later had a second appraisal done – only that time, they had a white friend pose as the owner of the home – and the appraised value suddenly jumped to almost $1.5 million.

The problem of appraisal bias is complicated by the fact that much of it is not intentional. Dawn M. Molitor-Gennrich, president of Molitor-Gennrich Consulting Inc., and Francois K. Gregoire, 2021 vice-chair of the National Association of Realtors’ Real Property Valuation Committee, wrote in Realtor Mag this summer that “without ill intent, some may not always competently adhere to appraisal standards.”

The FHFA said its latest review was focused on what appraisers wrote on their official forms with respect to neighborhood descriptions and other attributes. The agency said it found numerous examples where appraisers would make reference to a neighborhood’s racial make up or the percentage of its population that was comprised of immigrants.

The FHFA cited one example of a description, which stated that the area in question was “originally founded as whites-only city or sundown town” but has since become “fairly diverse” with a “diverse school system.”

“By updating industry norms on the type of neighborhood information that is appropriate to include and moving neighborhood descriptions away from the examples we shared above, we can begin to establish more equitable assessments that ensure fair and unbiased property valuation for all,” Broadnax and Wylie said.