Reprinted below is the introduction to a newly released AEI Housing Center report that examines the presence and extent of valuation gaps between Whites and Blacks in home appraisals:
Multiple stories in the news over the last several years have reported on assertions of racial bias by appraisers on home refinance or home equity loan appraisals. The stories unfold as follows: After getting a seemingly low first appraisal, a Black borrower requests and receives a significantly higher second appraisal- by our estimate from the stories an average of around $126,000 or 25% higher than the first one. The stories generally note that the second appraisal took place after removing all traces of race and having a White friend stand in during the appraisal. The implication is that intentional and perhaps unintentional appraiser bias is commonplace, pervasive, or systemic and this results in large valuation gaps for Black borrowers relative to White borrowers.
We undertook the first study, which we released in January 2021, to statistically examine the level of racial bias in human performed appraisals using a large dataset. We found that contrary to media allegations, racial bias by appraisers on refinance loans is uncommon and not systemic.
In the meantime, a lot has occurred. The Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), which was created to investigate claims of racial inequities in housing, recently made its recommendations. Freddie Mac explored appraiser bias on purchase loans and FHFA released a blog post citing a few instances of racially charged language in the appraisal form’s free-form text fields (more on these studies below). The above-mentioned studies and proposals are neither based on sound research nor provide appropriate policy solutions. On the other hand, rigorous statistical analyses by Fannie Mae and Ambrose et al., which rebuffed the narrative and conclusions of PAVE and Freddie Mac, were largely ignored.
Even Congress has sprung to action with Rep. Maxine Waters, chair of the House Financial Services Committee circulating draft legislation for the Fair Appraisal and Inequity Reform (FAIR) Act, which would nationalize the appraisal process. However, the dangers from federal overreach and from solutions based on incomplete research are large.
This short report provides an update to some of our prior research, taking advantage of two additional years of data, which increased our sample size from 240,000 to almost 890,000 due to the refinance boom induced by low mortgage rates after the start of the COVID-19 pandemic. Using the expanded dataset – just like with the initial dataset – we find that appraiser racial or ethnic bias is not systemic or widespread.
However, more research is needed to identify the extent of “bad apples”, implicit bias, and incompetence. For this to happen, one needs to study individual appraisers. The data already exist today and such a study should follow the methodology recently outlined in a Fannie Mae study, for which researchers have already assembled a substantial database. At the end of the paper, we propose a detailed outline on how to conduct such a study. Given the seriousness of the accusation, an independent regulator should evaluate the work of individual appraisers for both bias and incompetence without delay using readily accessible data.
By Edward Pinto and Tobias Peters