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Appraisal Trends: Understanding and Preventing Appraisal Bias

We know how important appraisals are to getting hopeful homeowners to close on their dream home. Yet, if information is shared during these reports that may sway whether the borrower gets the correct market valuation for their potential house or not, discrimination may have occurred. That’s where appraisal bias may come into play, with the potential for a house being appraised for a lower value based on a variety of subjective elements.

Bias has no place in the homebuying process, but appraisal reports are not always immune! In this post, our own David Foster, Enact’s Senior Real Estate Appraiser, outlines some helpful best practices and considerations to help you prevent appraisal bias from impacting your borrowers.

What is appraisal bias?

For many Americans, homeownership is key to helping build equity and generational wealth. But with many factors in today’s environment making buying a home feel daunting, we in the industry don’t need to add appraisal bias to the mix.

Appraisal bias exists when demographic elements like race, ethnicity, or national origin impact the opinion of value rendered by a professional appraiser. Here are some helpful appraisal definitions from the HUD to help you effectively navigate these reports and their needs:

Neighborhood The defined location/community where the property is located.
Subject Property Condition The condition of the subject property, recent updates and additional features.
Comparable Sales Recent comparable sales that are as similar to the subject property. If sales are limited it may be necessary to extend search parameters to include other neighborhoods similar in economic demographics.
Adjustments and Reconciliation Individual adjustments based on current market data that would impact sale prices. Reconcile adjusted sale prices based on most similar sales. Example of adjustments are for differences in gross living area (GLA) and bathroom count.
Appraiser Comments Section within the report where the appraiser comments on their observations and findings during the process; adds any data that may justify how they determined the market value of the home.
Reconsideration of Value (ROV) Occurs when an appraiser’s opinion of value is not agreed upon by the parties involved in the transaction, and a dispute is filed with the lender.

Bias in an appraisal report can cause a series of issues and may even be a contributing factor to widening the wealth gap in many communities of color across America. That’s why it’s important to stay knowledgeable and get familiar with best practices to prevent this kind of bias when you encounter the appraisal portion of the homebuying process.

Best practices for report creation to prevent appraisal bias

Education is key to helping prevent the possibility of bias. So to help with information overload, we at Enact are providing some main takeaways for you to remember.

Neighborhood description:

  • When describing the neighborhood makeup, or identifying potential external influence, the appraisal should not have descriptive terms pertaining to race, religion, or any inclusive or exclusive terms that may impact the readers understanding of location.
  • To some the limiting of descriptive terms may “water down” the appraisal where the reader does not have a full understanding of the location makeup. By keeping the explanatory comments for location to geographic boundaries only, this would allow the data to speak for itself.
  • Terms such as “non-residential” influence for properties adjacent to properties that are not residential shows the reader of the report there is potential external influence without drawing conclusions of items that do not impact the risk decision.

Property condition description:

  • Descriptive terms for property condition should focus on physical features only.
  • Terms like “poor quality,” or “no pride of ownership” may lead the reader to draw conclusions for the borrower/homeowner. For example, a home described with poor quality could lead the reader to feel the subject will not be maintained in the future, perhaps influencing the lender on their decision.
  • If condition concerns are observed, the report should identify items impacting livability, soundness, and/or structural integrity. The removal of subjective terms again allows the focus to be on the sales data in the report.
  • Sales of similar condition will demonstrate market reaction/acceptance for homes deemed comparable to the subject.

Descriptions of buyer(s), seller(s), and property owner(s):

  • The buyer, seller, and property owner should be identified by name only in the appraisal report.
  • Race, religion, sexual orientation, familial status, or income have no impact on the appraisal results.
  • The appraiser does not advocate for any parties in the transaction and is to provide an unbiased report. That said, any terms identifying the parties to the sale other than name should not be included.
  • Photos should not show people or all the reader of the report to develop bias.

How the GSEs navigate appraisal bias

Fannie Mae and Freddie Mac recently published lists of descriptive terms for location and condition that should not be used in the appraisal report. As we know, the appraisal report does not contain photos of people or family photos displayed in the home. This helps dissuade the reader from potentially having bias toward the borrower/homeowner. Similarly, the GSEs’ lists of unacceptable terms serves the same purpose. The appraisal should be developed without bias and should not contain any details that would lead the reader of the report to a biased decision.

Get the GSEs’ lists of unacceptable terms and practices:

Want to learn more about the GSEs’ guidelines and selling/servicing guides to help you with your borrowers during the homebuying process? Access Freddie Mac’s guides here and Fannie Mae’s guide here.

Industry response and action toward appraisal bias

Preventing bias is crucial, as homeownership continues to be one of the most essential financial assets, holding the key to wealth and stability for many families in America. Underserved communities have taken the brunt of biases in the industry, and as such, appraisals have contributed to this too. Reform has been top of mind for policymakers, resulting in more financial protection laws to help prevent discriminatory home appraisals, according to the Consumer Financial Protection Bureau (CFPB). Even if bias is unconsciously occurring through appraisals, the industry is responding and creating more ways to ensure that we all participate in making this country’s housing environment more equitable. Knowing what to avoid is essential to preventing bias.

Ultimately, the appraisal is meant to contain terms and descriptions that direct focus to the development of the value opinion for a home. It should not allow any readers to draw conclusions based on improper items that would impact value/marketability. Fair lending regulations do not exclude any person from obtaining financing to assist them in homeownership.

The appraisal is an integral part of the homebuying process. As appraisers and those of us in the industry, it is our responsibility to ensure the details in the appraisal report do not provide an avenue for potential bias. Stay knowledgeable and alert to help prevent appraisal bias.

More ways we can help

We offer underwriting services, along with training resources, to help you understand the nuances of navigating the appraisal report and potential biases that may come up. Be prepared and stay proactive to help your borrowers navigate the mortgage process more effectively.

And what better way to test your appraisal knowledge than to attend a training webinar? Have your NMLS ID handy and register today for our upcoming Appraisal Underwriting – Part II Focus on the Sales Comparison session on August 12, 2024 at 12 PM ET. You won’t want to miss it!

Be sure to make the most of your MI experience too. If you need some extra insight, you can always contact your Enact Sales Rep for more info. They’ll be happy to help you meet your business needs, answer questions, and point you in the right direction.


Source: David Foster is a Senior Real Estate Appraiser at Enact Mortgage Insurance.

The statements in this article are solely the opinions of David Foster and do not necessarily reflect the views of Enact or its management.


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