Appraisal Racial Bias (part 1) (Copy)

Racial bias is not a new topic but it is quickly becoming a heated debate point in the world of real estate valuation. Much of it centers around a few lawsuits in which an individual (or group of individuals) feel that an appraisal reflected a value lower than it should have because the appraiser considered the race of an individual within the overall equation and in turn, allowing it to negatively impact the valuation process.

I am not here to argue whether or not racial bias exists. As ugly as it is, I believe it does and in order to have a reasonable discussion about it, it must be acknowledged. I also believe, although I’d like to think it is minimal, racial bias exists in all professions- even mine. Without the proper acknowledgement, effective solutions cannot be achieved. With that being said, that is not the point of this article. What I would like to accomplish in the first part of this series, is to define the problem and refer to those regulations that prohibit racial bias in the appraisal profession.

What is racial bias and how can it be something that exists within real estate valuation? Racial bias refers to the primarily unconscious thoughts, preconceptions, or experiences that cause people to think and act in prejudiced ways.

According to an article written by Business Insider “Appraisal bias refers to discrimination in the appraisal process, such as assigning a lower value to a home because of the race of the person who lives there. Appraisal bias can happen consciously or unconsciously, or it can happen as a result of the lingering effects of historical discrimination that linked race to property values.

It's a violation of fair housing laws to discriminate in the appraisal process based on protected factors, which include race, color, national origin, religion, sex, gender identity, sexual orientation, familial status, or disability.”

You can read the full article here:

https://www.businessinsider.com/personal-finance/appraisal-bias

Not only is it a violation of fair housing laws, but it is also a violation of the USPAP (Uniform Standards for Professional Appraisal Practice) Ethics Rule that we as appraisers agree to observe. Under the Conduct portion of the Ethics Rule are the following statements:

“An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests AND

An appraiser must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.”

In short, Federal Law and our own Ethics Rule prohibits appraisers from completing appraisals with any form of bias, including racial bias.

FHA/VA/USDA Common Repairs

No one likes to prolong the arduous process for obtaining a home loan any longer than it needs to be. There are a number of things at stake such as rate locks, dates for closing, costs incurred during the process, etc. As an appraiser qualified and approved to complete appraisal assignments for loans that are insured by FHA, USDA and the VA, there are a number of repairs that come up regularly that definitely prolong the process and cost the borrower additional fees.  When a loan is insured by these entities, they require an added layer within our scope of work to include being aware of any items within the property that affect what we term the 3 S’s: safety, soundness and security.

Safety: those items that are deemed to be a safety risk

Soundness: the integrity of the structural improvements

Security: those marketable factors that would be necessary to secure financing; does the property have typical features for the market area that deem it a marketable property

When an appraiser is at the property for these types of loans, these are the components that become part of the observation process. Finding repairs will prolong the process by making the borrower/owner complete the repairs as a condition of the loan funding and requiring the appraiser to schedule an additional appointment to determine if all repairs were complete, which costs the borrower an additional fee.

For the purpose of this brief article, I will only note those items that affect the safety and soundness of the property. Here are some of the common items that I encounter:

-          Electrical safety issues that include: missing electrical outlet/switch covers; exposed wires that are not capped and enclosed in a secured junction box; covers not installed on electrical panels; main electrical panels still serviced by Federal Pacific Stab-lok breakers; frayed exterior insulation on the main incoming wire; missing weather cap on the upper portion of the main incoming wire; missing GFCI outlets on circuits near water sources such as the laundry room, bathroom or kitchen; missing weather covers on exterior outlets

-          Settlement issues that are noted by significant gaps in the mortar missing between the foundation blocks or stone; cracks that are seen going through the block and not through the mortar; shifted blocks; bowing walls in the basement

-          Water issues that are noted as standing water in the basement; discoloration that appears to be possible mold; leaking pipes; missing gutters; ponding water on the exterior near the foundation; missing gutters

-          Houses that are built prior to 1978 that have cracked, peeling, bubbling or flaked paint anywhere on the interior or exterior and on any of the property improvements (including fences, sheds, garages, barns, etc) as there is the risk of possible lead based paint issues

-          Any house (regardless of the year constructed) that has wood exterior surfaces with missing, cracked, peeling, bubbling or flaked paint as this surface needs to be protected from deterioration by being exposed to the elements

-          Missing handrails/railings on stairways and porches that present a safety hazard; while there are no specific height limitations or requirements, typically any stairway with more than 3 risers should have a handrail and those openings with more than a 30” height should have railings that are at least 36” high; while these are general guidelines, it is best to check with the local codes to ensure that any local requirements are being met

-          Doors that open over the top of stairways need to be reversed so that they open opposite the direction of the stairway

-          Doors between the garage and any living area of the home need to be a fire rated door

This list is not all encompassing but is a compilation of the most common problems found that need to be addressed as a part of the loan process. Having this information and addressing the issues prior to the appraiser appointment will only serve to save the homeowner time and money for an additional inspection by the appraiser to determine that all the repairs were made in a professional and workmanlike manner.

How to spot a bad appraiser.

Wouldn’t it be nice if “bad guys” all had mustaches like they did in the old black and white movies?

They ask you at the inspection “So, how much do you need this to come in at?”

That’s a step towards mortgage insurance fraud and a lost license. An appraiser’s data, reasoning and final opinion should be credible, reliable, independent, impartial and objective. The financial collapse of 2008 was a prime example of what happens when various parts of the real estate machine stop functioning objectively and begin to “make deals work.” We occasionally still hear reports of agents and lenders telling homeowners to try to influence the appraiser’s opinion. Make no mistake - these individuals are trying to shift the liability for mortgage fraud from themselves to another party.

The overall health of the real estate market relies upon all parties acting in an ethical fashion, and as a consumer, you have a part to play in that. If you ever experience this from an agent, feel free to call the Pennsylvania Association of Realtors and report an ethics violation by clicking here. If you ever experience this from a loan officer, feel free to report this behavior to the CFPB here. If you feel that an appraiser has artificially inflated a market value opinion, report this behavior to the PA Appraiser Board here.

They hide material defects in their reports.

After nearly 20 years of appraising, we’ve seen some weird things. Wells in living rooms, septic tanks in basements, bomb shelters, and we could go on. An appraiser who runs across one of these items knows that they are in for a long couple of days. Wouldn’t it be nice if they just… left it out of the report? No, that’s fraud.

Appraisers appear before the state board annually who attempt to hide material defects. Perhaps it was because they were lazy and didn’t want to deal with it, or they wanted the deal to go through and knew that the high tension power lines overhead would be an issue. Whatever the reason, these add up to fraud and can have serious penalties.

There are two ways to take a picture of the front of the home above… one hides the defects, and one shows that the property is built between powerlines, next to a highway overpass and across from a storage facility.

They always come in at exactly the contract price.

If agents have done their job, then the contract price should be close to the market value. In an ideal world, both agents fight for the interest of their client (whether the buyer or the seller) and this results in a market value sale. However, the agent has a financial incentive to see the price be as high as possible… because that’s where their commission comes from. We know that most agents don’t allow this to affect them consciously, however, the statistics show that it does have an effect across the country. If an appraiser only even “makes the deal work” then they are not doing their job to protect the interest of their client, who is most often the lender.

They offer to talk to you about everything.

This one is hard to understand. Uniform Standards of Professional Appraisal Practice (USPAP) requires that appraisers maintain confidentiality with their clients, and their client is the entity who contracts them to perform the appraisal. In mortgage transactions, this is almost always the bank OR another third party, and almost never the homeowner or buyer. This means that an appraiser following the standards of the profession can not talk to you… even if you paid your bank for the report.

We know that this is frustrating, however, it is the rule that governs the profession. Sadly, to get your questions answered you can not go directly to the appraiser, but rather must go to your lender. If an appraiser says, “I wish I could talk to you, however, you are not my client,” they’re not giving you the run-around, they’re doing their job right.

They “just make it work.”

This is code in the industry that usually means, “We don’t care about a credible report, just put something together that allows us to close this loan!” We’ve addressed above how this can happen in the value or in material defects, but sometimes it has to do with the whole process.

What happens when a property is truly a white elephant? Strange from top to bottom. The appraiser has 0 comparable properties after going back 10 years. The property is so unique that the appraiser fears there isn’t a market for the property (making even the cost approach to value non-credible). Hard work and a lot of research will sometimes reveal credible data with which to make adjustments, but sometimes, there just isn’t data.

Good appraisers at this point turn the assignment down and walk away. Bad appraisers stick their finger in the air and make something up.