Hot Topics in Financial Services: All Eyes on Home Appraisals

Making Headlines

The home appraisal process made national headlines in 2008 during the Great Recession, as analysts pointed to the role appraisers allegedly had in the upward spiral of property values.

Mortgage lenders rely on independent appraisal reports to help them make sound underwriting decisions. Lenders routinely request a licensed real estate appraiser to provide an objective opinion on the market value of the property being purchased by the borrower. Following a visit to the home, where the appraiser will take photos and measurements and evaluate the condition of the property, the lender receives the report results on a standard form. The appraised value of the subject property can cause changes in the contract price if it’s lower than expected.

The belief over a decade ago was that independent appraisers weren’t quite independent enough. Now appraisals and appraisers are back in the news.  During the first two weeks of March, two announcements regarding home mortgage appraisal dominated residential mortgage publications:

Fannie Mae: Valuation Modernization

On March 1, 2023, Fannie Mae, a leading source of mortgage financing in the U.S., announced that it is “moving away from implying that an appraisal is a default requirement” for a borrower obtaining a Fannie Mae mortgage as part of an effort to “modernize” appraisal options.

In its Selling Guide announcement, Fannie Mae explains that “valuation modernization helps lenders, appraisers, and risk investors manage collateral risk more effectively, while also benefiting consumers via greater appraisal accuracy, lower costs, and increased speed of loan decisioning.”

The updated guidance to lenders includes a new term, “value acceptance,” which describes and formalizes the process Fannie Mae has been using to incorporate data and technology to evaluate and accept a lender-provided property value, most likely obtained via an appraisal.

Consistent with this, Fannie Mae also introduced an alternative to the full appraisal called “value acceptance + property data.” With this new option, lenders may use a vetted third party to conduct interior and exterior data collection on the subject property. An appraisal is not required. Since Fannie Mae has been active in fighting appraisal bias (discussed below), it’s logical to assume the above is in response to the efforts to eliminate appraisal bias in residential lending.

CFPB & DOJ: Discriminatory Home Appraisals  

On March 13, 2023, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) filed a statement of interest informing mortgage lenders that they can be liable under the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) for relying on discriminatory appraisals.

This action points to the ongoing attention the two agencies have directed toward appraisal bias, and they are not alone. The CFPB and the DOJ are joined by all of the bank and credit union regulatory agencies, plus the HUD, USDA, VA, FHFA (which supervises Fannie Mae and Freddie Mac), and other agencies in the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). On June 1, 2021, President Biden charged PAVE with investigating appraisal bias and recommending solutions.

Appraisal bias is the practice of an independent appraiser placing a lower value on a property due to racial or ethnic bias. As mentioned above, appraisal bias is a form of discrimination that can violate the FHA and ECOA or even violate the Dodd-Frank Act’s standards for preventing UDAAPs (unfair, deceptive, or abusive acts and practices) to the extent it causes consumer harm.

Regulation

Multiple regulatory bodies and other agencies supervise the home appraisal process, as follows:

• The appraisal industry is regulated by the Appraisal Foundation, which is authorized by Congress to set appraisal standards and appraiser qualifications.
• The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC) monitors and reviews the work of the Appraisal Foundation.
• Bank and credit union regulators (OCC, FDIC, NCUA, FRB) examine financial institutions and include in the scope of those exams discriminatory and harmful conduct toward consumers, including reliance on discriminatory appraisals. All of these regulatory agencies are part of PAVE.

The Path Forward

Consistent with Fannie Mae’s announcement at the beginning of March 2023, the increased use of data and technology is seen as part of the path forward toward less bias in home appraisals. For lenders, increasing awareness of appraisal bias and training on fair lending practices for employees involved in the residential mortgage process will help identify bias when it does exist.

Lenders should also update appraisal procedures to include a review and challenge of home appraisals, with an eye on appraisal bias. From the perspective of the appraisal industry, two initiatives will help: 1) increasing the number of minority (race and gender) appraisers, in that most appraisers are currently white and male; and 2) including more fair lending information in the required curriculum for appraisers.

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