HUD Secretary: Home appraisal bias takes away 'opportunity to build wealth'

Home equity is one way to create generational wealth. However, for Black and Latinx homeowners, homeownership doesn’t always render the same result.

A recent study by Freddie Mac found that “minority applicants are more likely to receive an appraisal value lower than the contract price.”

“The biggest thing we do in our society to build wealth is homeownership,” Secretary of Housing and Urban Development Marcia Fudge told Yahoo Finance Live (video above). “If we start to devalue the homes of people of color, then we have taken away the opportunity to build wealth.”

To address appraisal bias, the Biden administration created an interagency task force, Property Appraisal and Valuation Equity (PAVE) co-led by the U.S. Department of Housing and Urban Development (HUD) and the White House Domestic Policy Council.

Although the Fair Housing Act was passed in 1964 to outlaw redlining and discriminatory practices, it didn’t explicitly include appraisals.

In 1976, the Department of Justice (DOJ) sued the American Institute Of Real Estate Appraisers (AIREA) of the National Association of Realtors (NAR), the Society of Real Estate Appraisers, the United States League of Savings Associations, and the Mortgage Bankers Association of America (MBA) for engaging in unlawful discriminatory practices causing appraisers to “treat race and national origin as negative factors in determining the value of dwellings and in evaluating the soundness of home loans.”

Although a settlement required the defendants to adopt a policy that using race and ethnicity as a negative factor was unlawful, it wasn’t until 1988 that Congress amended the law to include appraisals under the purview of the Fair Housing Act.

“Even though the Fair Housing Act pulls some of it out, we're saying, across the board, if you discriminate, it is a violation of law,” Secretary Fudge said.

“I live in an all-Black community, two doors from an all-white community, but my home is valued at $25,000 less than the house two doors from me,” Secretary Fudge said. “My house is bigger and my lot is bigger. I am losing equity and wealth every single year at an amount of $25,000 a year.”

For Black homeowners, homeownership is also statistically more likely to lead to a nondeductible loss because homes in Black neighborhoods are undervalued and sold at a loss, according to Dorothy A. Brown, a tax lawyer, professor and author of The Whiteness of Wealth.

According to the Brookings Institute, homes in Black neighborhoods are valued $48,000 less per home compared with homes in other neighborhoods of similar quality and amenities. This disparity amounts to $156 billion in cumulative losses in Black neighborhoods.

Additionally, white homeowners in predominantly Black neighborhoods received higher appraiser values for their homes than Black homeowners in the same neighborhood, according to a Fannie Mae report that looked at appraisal values during the refinance process.

“We found appraisals for Black borrowers came in a little bit lower,” Lyle Radke, senior director of policy at Fannie Mae, said in a HousingWire lunch and learn series on the potential of appraisal bias. “What we found is for white borrowers in those same neighborhoods the appraisal came in a little bit higher. There is a disparate impact relative to the automated valuation models (AVMs) — it is small though, in the range of a few thousand dollars.”

Overall, a lower appraisal is a real setback for Black homeowners because it lowers their home equity and limits their ability to build wealth by refinancing into lower mortgage payments, cashing out to pay for college, or downsizing to retire.

“I have seen appraisals in Black neighborhoods $70,000 off real value because appraisers are unfamiliar with the neighborhood and don’t understand the competitive market,” Carlo Batts, a member of the Appraisal Institute (MAI) and principal of Rittenhouse Appraisals in the greater Philadelphia region, told Yahoo Money.

“The appraisal problem is multifaceted,” Batts said.

The lack of appraisers of color, along with appraisal management companies (AMCs) operating like an arm of the mortgage company are big problems, Batts said. And mortgage companies going with the lowest appraisal fee to save money typically means inexperienced appraisers.

“Mortgage companies [also] push [artificial intelligence] valuation models because of the turnaround time to fund loans quickly or hybrid appraisals of drive-by appraisals and pictures,” Batts said. “However, GIS modeling uses Census data and other race-based data that incorporates bias. The historical data that has been collected includes appraisal bias, which has now come to light.”

AMCs were created from the Dodd-Frank Act to avoid overvaluation of homes that led to the 2008 housing crisis. Unfortunately, not everyone is a fan of them.

Tenisha Tate-Austin and Paul Austin filed a lawsuit against the appraiser and AMC company that hired the appraiser for undervaluing their home by nearly $500,000, Caroline Peattie, executive director of Fair Housing Advocates of Northern California which represents the homeowners, told Yahoo Money.

“You have a system where 97% of all the people who appraise properties are white and they have no concept of some of the biases that are inherent within the system itself,” Secretary Fudge said.

Representation matters, especially when it comes to home valuations. Black realtors and brokers have long noted how appraisals devalue Black neighborhoods and decrease home prices for sellers.

“You never see a house in a Black neighborhood appraise for more than the list price,” Mel Ligon, an independent real estate broker in Chicago with over 20 years of experience in residential and investment properties, told Yahoo Money. “If appraisers are not from the neighborhood, the appraised value is tainted and typically lower.”

For Black realtors specializing in Black neighborhoods, it is a common occurrence.

“I had a client who had a three bedroom home and received offers over $300,000, well over the asking price,” Rhonda Williams, a Chicago realtor with Berkshire Hathaway, told Yahoo Money. “The appraiser appraised the home based on the most recent sale — three years ago at $250,000. My client sold the home for $250,000, losing $50,000 in equity.”

According to data from the Redfin analysis, “in Chicago, homes in primarily Black neighborhoods are valued at an average of $56,000 less than comparable homes in primarily white neighborhoods.”

Homeownership is typically the main vehicle for Americans to generate and pass down wealth. If Black homeowners are losing equity due to undervaluation, it widens the racial wealth gap.

“We have to take away the inherent bias that homes of Black and brown people are worth less,” Secretary Fudge said. “This whole concept of appraisal, valuation, and equity is something that we know can only make things better for people of color.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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