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| home appraisal bias event, consumer finance protection bureau, hud, mary cummins, fha, real estate appraisal, discrimination |
Today August 3, 2021 I just heard about this meeting. As a certified licensed real estate appraiser on the Federal approved real estate appraiser list I was not notified about the meeting which is why I didn't see it live. Stakeholders should be notified of these meetings. They should also have a real estate appraiser on the panel for many reasons. The people on the panel were missing key information and insight about the main issues.
My notes are within the meeting agenda outline. I haven't watched the second half yet but I will. The second half has to do with civil rights issues. I've already seen part of that presentation from one speaker. Below is a link to the two hour video. My personal comments are in ( ).
"We held a virtual event on Tuesday, June 15th, 2021 at 1:00 p.m. EDT for virtual discussions on home appraisal bias. Acting Director Dave Uejio hosted discussions with civil rights organizations, housing policy experts, and other federal agencies to explore how racial bias in housing appraisals and automated valuation models may occur."
01:00 PM – 01:06 PM Welcome, Federal Agency Panel and Acting Director Introductions Alicia Criado Hampshire, Public Engagement
01:07 PM – 01:10 PM Opening Remarks Acting Director Dave Uejio
Dave Uejio: The Appraisal Institute said it's a growing problem in the industry. San Francisco couple who got rid of black photos, items in their home received $500K higher appraisal. (That case had to do with other issues which were not discrimination, see here https://mary--cummins.blogspot.com/2021/02/alleged-discrimination-home-appraisal.html) Extreme example but underscores example of home appraisal bias.
Appraisals are imprecise. A low appraisal makes comparable homes value lower. (Wrong. Low sales prices would do that, not appraisals). Biden said he'll take action. I am focusing on long standing inequities. (He read his entire report) We will have experts and federal agency partners and discussions with consumer rights leaders and consumer advocates.
01:11 PM – 01:12 PM Research Presenter Introductions Alicia Criado Hampshire, Public Engagement
Introduces Michael Neal and Jim Park.
01:13 PM – 01:23 PM Presentation on the Urban Institute’s research on Automated Valuation Models (AVMs) Michael Neal, Senior Research Associate, Housing Finance Policy Center, Urban Institute
Michael Neal: AVMs (Automated Valuation Methods). They disproportionately affect black neighborhoods. AVM as a substitution for and compliment to in person appraisals. Appraisers contributed to the 2008 real estate bust and great recession (FALSE. That was lenders giving loans to people regardless of their ability to pay them back) Appraisers have a role in perpetuating racial inequities and a role in perpetuating the pandemic. (Even the pandemic now? WTH?!) We can eliminate, reduce racial disparity by using AVMs. We looked at three ways to determine inaccuracy in avms. AVMs are far off the real value of homes (How do they know what is the "real value?"). We compared inaccuracy of black to white areas in three cities, Atlanta, Memphis and Washington DC.
White and black areas both look the same with avms in terms of inaccuracy. The magnitude of inaccuracy is greater in white areas than black (Magnitude is error rate x value). We compared to underlying home value. The percent magnitude of inaccuracy is greater in black vs white areas. (It's not color but home value ranges. As Zillow representative responded in another meeting there is more inaccuracy on the tail end of the value ranges i.e. very low. Lower priced homes are also in poorer condition. They're generally older. There is less data in poor areas so not as accurate). We try to explain via regression analysis via four factors, property differences, neighborhood conditions, turnover rate and majority of black vs white. More turnover increases avm accuracy. (More turnovers, more data, makes sense!) The percent majority race of the neighborhood is statistically significant (because POC tend to own lower priced homes). AVMs shouldn't be aware of race but they are. (No. It's because POC tend to own lower priced homes. More error in lower priced homes due to condition, lack of data. Zillow stated this and I agree).
Ways to invest in black communities. Black banks and improve home condition. Need more data to determine condition better. A too low estimate can threaten home purchase. Contact me. (His read his report) (Here is a link to the underlying paper His paper confirmed what I stated above. There is more error in low priced homes. "Majority-Black neighborhoods tend to have lower home values, more heterogeneous properties, higher shares of distressed home sales and gentrified neighborhoods, and lower household incomes. All these factors are associated with a greater magnitude of percentage error in AVM estimations." His paper confirmed that AVMs value white and black owned homes the same. They have the same amount of error. This is the opposite of what Andre Perry stated. Andre Perry also used AVMs. Neal and Perry are both black. The areas aren't 100% black. Poor whites, browns are also affected by AVM data.)
01:24 PM – 01:34 PM Overview of ASC’s role in appraisals and D&I efforts Jim Park, Executive Director, Appraisal Subcommittee, Federal Financial Institutions Examinations Council
Jim Park OSC: Bias is an important issue. Appraisal regulatory system. Three main components, states, federal and private sectors. Federal carries out licensing, discipline. Appraisal Foundation has two boards, ASB, AQB. They set USPAP and minimum requirements to be an appraiser. ASC is Federal government. Maintain national registry of appraisers and AMCs.
ASC member agencies. Slides.
Diversity equity inclusion. I am concerned with reports of alleged racial bias in appraisals and lack of diversity in the profession. Recent allegation of racial bias and lack of diversity. We must regain public trust. ASC has initiatives to review bias, review of USPAP and credentialing of appraisers. We will be hosting roundtables on bias. Appraisers and Assessors are 96% white, 70% men. I find it deeply disturbing (Jim Park is a white male, see pic above).
Lack of new appraisers. In the past 10-12 years 20-25% decline in national registry. Aging population, declining numbers, and few new entrants while demand increases. One reason is supervisor trainee model which is the only way to become appraiser, by the apprenticeship model. Generally this is only family members. (My article about the problem with the program with solutions) This contributed to lack of diversity. We're working on an alternative but nothing yet. We are doing research to figure this out and find solutions. HR 2553 would establish inter agency task force to analysis federal underwriting standards and guidance to increase diversity in appraisers. Need study our entire industry. (He read his report).
01:35 PM – 02:05 PM Federal Agency Panel Discussion, acting director.
Todd Harper. NCUA, National Credit Union Administration. Appraisal bias is important to explore. Must close the wealth gap (for POC). Purchasing home is one of three major ways (other two are starting a business and retirement savings accounts). Dodd Frank Act 2010 reforms. I've been reading news accounts of bias. Existing statutes, the FHA need to address the problem. We need to enforce. Quality control standards for AVMs were supposed to have been made. Formulas can be garbage in, garbage out. Need good quality data going in to get good quality results. (AVMs use like kind appraisal method used for centuries all over the world choosing most similar sold homes for comparison. It's the main asset valuation method similar to Kelly Blue Book car value system. This is what appraisers use.)
Lender owns the appraisal though consumer pays for it. Consumer needs new appraisal to go to a different lender. Consumer should own so can shop appraisal and loan with another lender. (He read his report. Appraisals can currently be transferred from one lender to another with an appraisal transfer letter that references Home Valuation Code of Conduct (HVCC), Appraiser Independence Requirements (AIR) and FHA Guidelines regarding appraiser independence (ML 09‐28) . Ask for the letter.)
Michael Hsu, Office of the Comptroller of the Currency (OCC). We must remove structural obstacles. Need access to affordable housing. Lower appraisal value suppresses property tax and money to education. (Lower sales prices do that, not appraisals). It can negatively affect wealth for minorities. Homes in black neighborhoods are worth 1/2 homes in white neighborhoods (FALSE! He cited statistically flawed Andre Perry report. Even Perry said 23% even though it's zero). $156B loss in value nation wide per Brookings Institute (FALSE! Andre Perry's report is statistically flawed and therefore meaningless. He is not the institute but one person who wrote a paper that was not peer reviewed. There was no legitimate research involved but cherry picked numbers from flawed comparisons of two small very different groups chosen by one person. He did not compare similar homes in similar areas.)
We must hold banks accountable but need collective effort. I applaud civil rights leaders for holding us accountable. There is 11 trillion in mortgage loans in the US.
McCargo, HUD Director for Marsha Fudge. On behalf of Fudge and HUD, thanks. Growing number of reports of bias in the media. Reports of discrimination have increased 10x since 2019. This includes lenders, lending requirements and the lack of diversity of appraisers. Over 85% are white, less than 2% black. Joe Biden told Fudge to lead the task force to address inequities for POC. It will include federal regulators and agencies. Will assess extent, causes, effect and recommend actions. We will engage stakeholders who have information (but not real estate appraisers or people in the actual industry for some reason). June is homeownership month.
McCargo: News stories. There's a new one a week. There's a wealth and homeownership gap.
Todd: This isn't a new issue. People fleeing Poconos from NY paid more than what homes were worth. The credit union must meet needs of all even poorer people. Need to help POC access and build wealth to overcome racism over time. We need to diversify appraisers and regulate AVMs.
ASC: Black homeowners thinking they must "de black" their home is heartbreaking. The idea the tactics work is frustrating. (They don't work. See articles on three main incidents of alleged racism in real estate appraisals which showed the original appraisal values were correct. Two of them didn't "de black" the home. Article 1. Article 2. Article 3. ) The heart of appraisal is objectivity and independence. The (color of the) owner has nothing to do with opinion of value. People must report any perceived discrimination by appraisers to state departments. If they are discriminating, they are violating USPAP and should be disciplined.
Todd: ASC hotline?
ASC: Hotline refers users to proper department.
Hsu: Not a new problem just more awareness from media articles. This puts an urgency on the issue. It's great all agencies are working together on this.
Dave Uejio: Difficult for consumers to discern discrimination. (Consumers think any appraisal which is lower than what they personally want is "discrimination.") What is contributing to this problem is impacting valuation in communities.
McCargo: Real estate is local. We should focus on state and local levels. How diverse can we get the industry.
Jim ASC: Fed and states set requirements. States can exceed federal levels. Need more diversity on state appraisal boards. Needs more minorities. Only Alabama requires it. Appraisals result in a one point value. Not how the market works. (Yes, it is. A buyer only pays one price for a property. That is "market value." Our appraisal actually includes a range of values if someone on the panel had ever seen one) Market reflects a range. (As a whole but not for the specific property which will be secured by a loan backed by the federal government and resold as an investment). Maybe appraisers should do that. It might help lending process. (Lenders would refuse as the loans could not be guaranteed or resold as investments). We should provide more data such as GSEs (Government Sponsored Enterprise is a quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy. Created by acts of Congress, these agencies–although they are privately-held–provide public financial services. Fannie Mae, Freddie Mac). If more data made available to appraisers, consumers, might work as check and balance. Make it more difficult to allow intentional and unintentional bias to creep in. (Might be invasion of privacy to share what someone's home appraisal especially if it includes the appraisal which shows interior photos. Public records do show new loans.).
Dave Uejio: What do you think the bureau should be doing about this?
McCargo: Awareness has gone a long way. Increase in complaints last couple of years (caused by the rising market and not necessarily discrimination). People are learning what it is. Better data collection to better inform. GSEs have lots of data. Need to make it more visible.
(? speaker): AVMs are playing a huge role today. GSEs use them for appraisal waivers. Not a panacea but based on historic data and unresolved issues. We should promote research on AVMs to determine risk, error. (There are risk and error scores posted with values, value ranges with most AVMs. Some like CoreLogic won't post an AVM if they feel risk, error too high due to lack of data). Need certification for AVMs. Maybe make publicly available the algorithm so all can use. (Any appraiser can tell you the algorithm. It's not a secret. See below*)
Mike Todd: Need to work on AVMs and consumer education. Federal appraisal law and oversight of private lending. Look at some states' laws on bias to get the best ideas for federal standards and regulations. Federal transaction levels are $400,000. In 1989 it was $10,000. Higher threshold doesn't protect people who buy cheaper homes as well.
Hsu: Office of the Currency. Stories are anecdotal but need research to back it up. (YES! The media stories are not only anecdotal but the three main ones are FALSE. The government should do independent research on alleged bias. Mike Neal already did and he said there's no difference in appraising based on AVM values between white and black neighborhoods. Andre Perry's report is based on the same AVM values).
I'll post notes from the civil rights discussion later.
*The appraisal value algorithm. Appraisers use matched pairs analysis to value homes. We compare the subject property to the most similar recently sold nearby homes with the same amenities which sold on the open market in armslength transactions. We give more weight to the more similar home sales. We don't use averages, means or median prices. While we include properties which are listed and not sold we don't give them as much weight. We actually do give a value range via the comps we use. We are generally limited by the unadjusted highest most recent similar sold price. We must use sold comparables that bracket the most important features which are size, bed/bath count.
The appraiser searches properties which are +/- 15% difference in gross living area within a half a mile radius which sold on the open market within the last three months. We go wider if there aren't enough comparables. We need at least three sold comps, one pending and one listed. We then choose the most similar recent comparables to the subject.
Next we adjust for differences between the subject and the comparables. If one has three beds and another has two, we figure out the value of the third bedroom via regression analysis. We basically search sold homes which are similar in every way except the bed count. The difference in the three bed verses two bed home sales should be the value of the extra bedroom.
After we make the adjustments for all differences we have a range of adjusted and unadjusted values for all the comparables. The home sales that are the most similar carry the most weight. If we were appraising average newer tract homes which are identical there should be very little variation in values. Appraisers are extremely happy when we don't have to make any or at least not many adjustments. This generally only happens to me with newer average sized identical condos.
That's the home value formula the AVMs use though it's not in the form of a mathematical equation. I've written real estate value math equations for my HP12C. Maybe I'll write a simple one and post it here. I've mainly written appreciation, leveraged value, return on value...equations.
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