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EXECUTIVE SUMMARY
Action Plan to Advance Property Appraisal and Valuation Equity
This is the Executive Summary of the Action Plan.
Read the full plan for more detail.
Contents
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Action Plan SummaryAction Plan Summary
The Action Plan to Advance Property Appraisal and Valuation Equity is the blueprint for how all Americans can benefit fairly from the equity built through homeownership. The PAVE Action Plan:
Outlines the historical role of racism in the valuation of residential property
Examines the various forms of bias that can appear in residential property valuation practices
Describes how government and industry stakeholders will advance equity through concrete actions and recommendations
Just imagine if instead of denying millions of Americans the ability to own their own home and build generational wealth, we made it possible for them to buy a home and build equity into that [...] home and provide for their families.
PRESIDENT JOSEPH R. BIDEN
Introduction
For many Americans, the dream of homeownership and the long-term financial security this investment represents is a dream deferred or unrealized. Homeownership is often hindered by inequities within the current home lending and appraisal processes, which research shows disproportionately impact people in communities of color.
Though this broken system was created decades ago, perhaps the biggest drivers of the racial and ethnic wealth gap today are the racial and ethnic disparities in rates of homeownership and in the financial returns associated with owning a home.
Today, the median white family holds eight times the wealth of the typical Black family and five times the wealth of the typical Latino family.
On June 1, 2021—the centennial of the Tulsa Race Massacre—President Biden announced the creation of an interagency initiative, the PAVE Task Force (“the Task Force”). Co-chaired by U.S. Department of Housing and Urban Development Secretary Marcia Fudge and Domestic Policy Advisor Ambassador Susan Rice, the Task Force was directed to evaluate the causes, extent, and consequences of appraisal bias and to establish a transformative set of recommendations to root out racial and ethnic bias in home valuations.
The 13 member agencies of the Task Force engaged philanthropic organizations, academics, civil rights leaders, housing industry stakeholders, and everyday Americans who currently own, or aspire to own, a home. The Task Force heard their stories, perspectives, and ideas. As a result of this engagement, the member agencies of the Task Force committed to a set of actions to help ensure that every American has a chance to build generational wealth through homeownership.
The Impact of Inequitable Property Valuation
Throughout the 20th century, people of color were denied equitable access to housing as federal, state, and local governments systematically implemented discriminatory policies that led to housing segregation. These policies contributed to a gap between the values of homes in communities of color and predominantly white neighborhoods.
Despite the passage of civil rights laws, most notably the Fair Housing Act, that were designed to ensure equal opportunity for homeownership, market value disparities persist and are a significant factor in today’s sprawling racial wealth gap.
The Purpose and Importance of Appraisals
An appraisal is a critical element of homebuying and lending processes as it establishes the value of the property as the collateral for a home loan.
The difference between a property’s value and the homeowner’s loan amount generally represents the homeowner’s home equity. One of the core benefits of homeownership is that a homeowner can build wealth by leveraging and growing that home equity. Greater home equity makes it less likely that homeowners will fail to repay a mortgage if they experience financial hardship. Therefore, the property valuation is a critical input to the risk evaluations that surround the lending process.
Home loan lenders hire appraisers specifically to provide independent, fair, and objective estimates of the market value of a property so that lenders can accurately evaluate risk. Most commonly, appraisers estimate the value of a home by comparing it to similar, recently sold properties in comparable neighborhoods.
An appraiser’s opinion of value is very dependent on that appraiser’s selection of comparable properties and the adjustments and weighting the appraiser applies to those selections. This decision has subjective elements that depend on the expertise of the appraiser and the appraiser’s familiarity with the neighborhood, resulting in a natural imprecision of the appraiser’s estimate of the home’s value.
New Studies Validate Appraisal Bias in the U.S. Housing Market
Researchers have observed a market value gap between majority-Black and majority-white neighborhoods for decades. On average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents. Statistical analyses show that accounting for neighborhood and property characteristics and amenities—such as the age of the property or its proximity to public transportation—does not explain the entire disparity. Recent research has identified appraisals as one of the drivers of the gap.
New research from Freddie Mac (2021) using census data finds 12.5 percent of appraisals for home purchases in majority-Black neighborhoods and 15.4 percent in majority-Latino neighbor-hoods result in a value below the contract price (the amount a buyer is willing to pay for the property), compared to only 7.4 percent of appraisals in predominantly white neighborhoods. This research corroborates prior observations that a neighborhood’s average appraised property value tends to decrease as the share of historically marginalized populations increases.
Very recently, a study of appraisal commentary (the free-form narrative section of an appraisal report, reflecting the appraiser’s reasoning for the property valuation opinion) revealed that appraisers sometimes make racial and ethnic references. For example, the study found that one appraiser wrote that a majority-white area was “not especially diverse ethnically,” and another appraiser noted that residents of a “predominantly Hispanic” neighborhood have “assimilated their cultural heritage” into the neighborhood.
The Impact of Undervaluation for Homebuyers, Sellers, and Communities
An appraisal that is below the contract price in a home sale can sometimes result in a higher required down payment for a home buyer. This unexpected, out-of-pocket increase can often cause a sale to fall through, potentially preventing a prospective buyer from purchasing a home. It can also result in a downward price renegotiation, helping the buyer, but reducing the sellers’ financial gains, which may in turn hinder that family in purchasing their next home.
A low valuation in a refinance transaction can be similarly damaging to a homeowner, reducing the cash-out available and in some cases affecting the refinance interest rate and mortgage insurance premiums the homeowner pays, which can result in substantial costs over time.
A widespread pattern of undervaluation in communities of color can impact an entire neighborhood. Each instance of a lower purchase price becomes a candidate for the next appraiser to choose as a comparable sale for the next appraisal in the community, carrying the impact of the lower value forward.
Over time, even a slight imbalance of undervaluation can have a significant effect on the property values in a community, and hence on the accumulated wealth of homeowners in that community. This effect can hinder families in that community from leveraging equity to pay for college, pay for repairs, or use as a buffer during a financial hardship. Reduced property values can also diminish the property tax revenue that funds the maintenance and improvement of community schools and amenities.
Task Force Commitments
I live in an all-Black community, my lot and house are bigger, yet my home is valued at $25,000 less than the house two doors down from me which is an all-white community. The Biden-Harris Administration acknowledges that communities of color like mine have lost billions of dollars solely through the appraisal process. We’re committed to taking meaningful action to increase homeownership and generational wealth for all.
HUD SECRETARY MARCIA FUDGE
Given the historical and continued impact of federal policies that enabled the persistent mis-valuation of properties in communities of color, the Task Force has carefully crafted a set of commitments that will further valuation equity within the housing market. This commitment is ongoing.
The Task Force is indebted to the countless stakeholders who shared their stories and ideas. Additional policy and research efforts will continue to benefit from a diversity of voices working together towards the common goal of ensuring that the American Dream of homeownership is attainable for all.
CATEGORY 1
Strengthening Guardrails Against Unlawful Discrimination in All Stages Of Residentials Valuation
Task Force Commitments
1.1
Clarify the application of the Fair Housing Act and ECOA to the appraisal industry to ensure apprais-ers have clear guidance on antidiscrimination obligations under current federal laws.
1.2
Update agencies’ and Enterprises’ appraisal-specific policies and guidance to reflect how nondiscrimination requirements apply to appraisers within these agencies’ and Enterprises’ programs.
1.3
Issue guidance and implement new policies to improve the processes by which a valuation may be reconsidered if the initial valuation is lower than expected.
1.4
Strengthen the standard appraisal dataset and data collection forms to reduce opportunities for ap-praisers to apply subjective criteria.
1.5
Address potential bias in the use of technology-based valuation tools through rulemaking related to Automated Valuation Models (AVMs).
1.6
Develop a legislative proposal that modernizes the governance structure of the appraisal industry to improve transparency and public participation in the establishment of appraisal standards and ap-praiser qualification criteria, and to advance diversity in the profession.
CATEGORY 2
Enhancing Fair Housing/Fair Lending enforcement and driving accountability in the industry
Task Force Commitments
2.1
Strengthen coordination among supervisory and enforcement agencies to identify discrimination in appraisals and other valuation processes.
2.2
Revise existing agreements between agencies involved in the enforcement of and compliance with fair lending and fair housing laws, as necessary, to increase collaboration among the agencies regarding appraisal discrimination.
2.3
Expand regulatory agency examination procedures of mortgage lenders to include identification of patterns of appraisal bias.
CATEGORY 3
Building a well-trained, accessible, and diverse appraiser workforce
Task Force Commitments
3.1
Update appraiser qualification criteria related to appraiser education, experience, and examination requirements to lower barriers to entry in the appraiser profession.
3.2
Increase engagement with states’ appraisal regulatory agencies to help remove barriers to entry and advance diversity in the appraiser workforce.
3.3
Require appraisal anti-bias, fair housing, and fair lending training for all appraisers who conduct appraisals for federal programs and work with the appraisal industry to require such trainings for all appraisers.
CATEGORY 4
Empowering consumers to take action
Task Force Commitments
4.1
Update and clarify government resources for consumers who believe they may have experienced appraisal bias.
4.2
Incorporate appraisal bias information into first-time homebuyer education courses.
4.3
Train housing counselors to empower them to assist potential victims of appraisal bias as part of pre- and post-purchase homeownership counseling.
4.4
Provide funding opportunities for testing, education, and outreach pertaining to appraisal bias and discrimination.
4.5
Execute a coordinated public awareness campaign to inform consumers of their rights, as well as to disseminate the new resources that will be available to them.
4.6
Inform FHA borrowers about the process to request a reconsideration of a valuation when the initial valuation is lower than expected.
CATEGORY 5
Giving researchers and enforcement agencies better data to study and monitor valuation bias
Task Force Commitments
5.1
Develop data-sharing arrangements among all relevant government agencies and pursue joint strategies to make appraisal-related data more widely available, foster federal research, and better enable enforcement related to appraisal bias.
5.2
Launch a standing interagency effort to identify and fill gaps in the current state of research and help inform future policy and enforcement priorities.
5.3
Define metrics that can help to identify and measure patterns of mis-valuation in the property valuation process.