Note: The following blog article is not to defend anyone or to place blame. It is simply a blog looking at this issue from the other side of things, the side that hasn’t been discussed in the media.
A couple weeks ago, I was privileged to speak on The National Real Estate Post about appraisal issues. One of the issues we discussed briefly was the ever-growing number of articles being written about allegations of racial discrimination in the appraisal profession. We have seen numerous claims being made in different parts of the country where a homeowner or borrower has claimed that an appraiser has deliberately engaged in undervaluing a home for a refinance or purchase, with the most recent one involving a woman of color in Indianapolis, Indiana.
Let me first state this. I am in no way advocating for anyone here. I am not saying that this didn’t happen in any of these instances. I am not trying to prove anyone wrong here. Suppose indeed any real estate appraiser conducted themselves in a manner that involved discrimination or racism. In that case, I support any efforts to have them removed from the profession I love and advocate so much for and personally apologize to the parties involved for these acts.
This blog attempts to put out information on the other side of this, the appraiser profession side since no other news media and organizations are willing to do so.
Let me start with what an appraisal is. As defined by the Uniform Standards Of Professional Appraisal Practice, or USPAP, an appraisal is the act or process of developing an OPINION of value. The opinion of value comes from gathering facts and information about the home such as its size, condition, style, location or neighborhood, and lot size, to name a few, and then compare that to other homes that have sold within the same area that have the most similar attributes as the subject property. To develop that opinion of value, the appraiser then compares all the features and by using methods such as paired sales, regression, cost guides, and more then make monetary adjustments for differences.
Appraisers are bound by many rules and regulations within the profession. The most important one being the Uniform Standards Of Professional Appraiser Practice or USPAP. Within USPAP, there is a section called the ETHICS RULE. The Ethics Rule States: An appraiser must not agree to perform an assignment with bias or advocate the cause or interest of any party or issue. In addition, this rule states “must not use or rely on unsupported conclusions relating to characteristics such as race, color, relgion, national origin, gender, marital stareligionmilial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value”. On top of that appraiser must sign a certification within all reports that states, “I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.”
To take it a step further, when appraisers are performing work for lenders or mortgage transactions, Fannie Mae states that appraisers must be prohibited from practices that include, among others; “actions that may have a discriminatory effect or may affect the use and value of the property; or basing the analysis or opinion of market value (either partially or completely) on race, color, religion, sex, handicap, familial status, or national origin, of either the prospective owners or occupants of the property being appraised or the present owners or occupants of the properties in the vicinity of that property.”
So what does this all mean? Well, it means that any appraiser found in violation of any of these practices can and most likely will lose their license, be fined, and ultimately lose their livelihood and career that they have put countless hours of training and more into.
Now that I have discussed this let’s dive into the other side of all this.
In all of these cases, we had a borrower have an appraisal done below what they thought their home was worth in the market. Each time the borrower went back to their lender to get a second appraisal done, that appraisal came in at close or above the value, they thought their home was worth. In the most recent case, the borrower had three appraisals done, two that were very similar in value ($125K and $110K) and a third one that was way above the previous two ($259K). In this claim and some others, the complaints stated that the higher values resulted from the borrower either taking down pictures etc, or having a white friend stand in for them, thus resulting in the claims that the lower previous appraisals were based on racism discrimination.
So what’s the other side of this, you ask? It seems pretty cut and dry, right?
Here is what we don’t know and what’s not being reported in the news. First off, no one has been entitled to see the appraisals that were done in any of these cases. No one has had an opportunity to take a look at or gather any information on them. The reports need to be analyzed by qualified and experienced people to determine the reports’ quality and analytical aspects to determine if any issues exist. Here are just some of the things that need to be examined within all reports:
1) The appraiser’s knowledge of the Market area or geographical competency
2) Who hired the appraiser, and did they hire the most experienced appraiser or just hire the cheapest appraiser. Was this an AMC (Appraiser Management Company or Direct Lender)
3) What products were used. Meaning were any of these done by an AVM (Atuomated Valuation Model) or a Bifuricated appraisal where an unlicensed inspector gathers data and sends to the appraiser to complete the report.
4) Was a proper analysis of the market area and neighborhood done?
5) Were proper comparable sales selected from the subject’s market area or neighborhood area. Comparable selection is of utmost importance within an appraisal report.
6) Was there any Undue influence put on any of the appraisers, or was there a violation of appraiser independence
7) What if any involvement did the lenders have in having a second or third appraisal result in a much higher value ( I state this because we do not know if the lender may have supplied an appraiser with information that, well they absolutely shouldn’t have)
8) What was the dialogue between the lender and the borrower once a complaint was made.
9) What were the sources of the data the appraisers used ( We are only as good as the data services and data supplied by realtors, tax assessors etc. and if the data is baked with poor information, than the results can be wrong as well)
10) What were the factors that had the borrower determine their value estimate (Zillow, Redfin, a private appraisal, realtor or something else). These online estimates often use inferior data and are not accurate themselves.
Again, If this is an act of Racism or discrimination, then it’s not to be taken lightly; however, until all information is presented properly, the allegations against others are just that. I would hope that the experts in the profession and other organizations would be willing to contribute their time to bring resolution to this issue. The last allegation named appraisers, their businesses as well as lenders, who without an actual deep dive into their work and reports are now in peril to the public court of opinion. I am all for creating solutions to the issues at hand. I am all for doing the right thing for everyone. I am all for being a human being. However, if people continue to put out insufficient information, don’t understand the laws and regulations, and don’t understand how an appraisal is developed, how can fundamental changes be made? Many cite the Andre Perry study, however his data is flawed based upon using zillow and the tax assessors appraiser (the tax assessor uses an entirely different method to value real estate) as his main points of reference as well as his inexperience, his lack of knowledge as an appraiser and no appraiser education at all.
So what is the solution? How does this narrative change? I’m not sure. In my opinion it needs to start at the very top, the very begining and from the results of past poor decision making. What I do know is this. Allegations are being made, and they are becoming more common. Investigations from HUD and others are happening; however, not one thing has been done to this day. Isn’t it time to gather all the information and determine what is happening? The blame these days is on the appraiser, however appraisers didnt create the past data. Appraisers didnt create the long past issues of redlining. Appraisers are just reporting and examing the data they have in front of them from the past and present to develop their opinion of value. The issues that remain today are a result of past injustices that are baked into the very data we appraisers, Realtors, and yes AVMS (Automated Valuation Models) use everyday.