MReport June 2022

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M R EP O RT | 29 EXPERT INSIGHTS T ai Christensen is the Diversity, Equity and Inclusion Officer and the Director of Government Affairs for CBC Mortgage Agency, a national down payment assistance pro- vider, and has 17 years' experience in the mortgage industry. She has been a loan processor, the manager of a mortgage brokerage focusing on modifying loans for families facing foreclosure, and the manager of a law firm specializ- ing in negotiating mortgage terms for families facing Trustee Auction dates. How are minority sellers im- pacted by appraisal bias? Appraisal bias typically results in a low valuation for homes in majority-minority neighborhoods. If they find a buyer for their home and the appraised value is lower than it should be because of appraisal bias, the minority seller will either have to lower the price of the home or risk losing the sale. Ultimately, this means sellers get far less money for their home than sellers in other neighborhoods. This can have a negative financial impact on these sellers, especially when they don't understand why similar homes in white neighborhoods are valued much higher than theirs. What about minority homebuy- ers; are they impacted by ap- praisal bias? Absolutely. Most minority buyers can't buy a home without a mortgage, and lenders won't fi- nance properties that aren't worth what the buyer agrees to pay for it. So, when the appraisal is low, the minority buyer is forced to come up with more cash or lose the property to an all-cash buyer. By the way, minority buyers are less likely to be able to get money from family members to make up the difference created by a low appraisal. So, appraisal bias hurts them in multiple ways. Is there an appraisal gap in mi- nority neighborhoods? There's a lot of evidence il- lustrating this. Last year, Freddie Mac crunched the numbers on 12 million appraisals over a five-year period and found that opinions of value were more likely to fall below the contract price in Black and Latino neighborhoods compared to white neighbor- hoods. The GSE also found that the more Black and Latino people in a neighborhood, the larger the gap. More recently, the HUD Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) released a report that found in majority Black neighborhoods, 12.5% of appraisals were under the contract price, and in majority Latino neighbor- hoods, the rate was 15.4%. In white neighborhoods, only 7.4% of appraisals were under the contract price. Does race and ethnicity data explain appraisal gaps beyond structural and neighborhood characteristics? It certainly appears so. The data suggests that even when taking structural and neighbor- hood characteristics into consid- eration, a property is more likely to receive an appraisal lower than the contract price when it is in a minority neighborhood. In fact, the PAVE task force report I men- tioned earlier performed statistical analyses that showed that neigh- borhood, property characteristics, and amenities did not explain the disparity in valuations. Is appraisal disparity a form of redlining? Definitely. When you're talking about redlining, you are talking about housing bias in minority neighborhoods and demograph- ics. Even though redlining was outlawed in 1965, the remnants of it are still here today in com- munities of color because values in previously redlined areas are much lower than other areas. This means that homeowners in majority-minority neighborhoods have less home wealth than majority white neighborhoods. In fact, some fair housing attorneys have referred appraisal bias as "present-day redlining." How does redlining impact minorities? If you go back to the 1930s, when redlining was an accepted practice, white Americans were moving into white-only neighbor- hoods and beginning the accu- mulation of wealth, which in the long run, benefitted the financial trajectory of their descendants. Meanwhile, minorities were driven to poor neighborhoods that they could afford or high-density multifamily housing. Even if they could afford a home in a major- ity white neighborhood, they couldn't, because these communi- ties prohibited people of color. So, in minority areas, appreciation and wealth accumulation was far less or nonexistent in many cases. That's still true today, all because of redlining. If there is a bright side, it is the fact that appraisal bias is becoming more widely known and talked about. The appraisal industry has acknowledged that appraisal bias exists and is taking steps to address it. Plus, the Biden administration recently adopted an action plan to dismantle racial bias in appraisals. For the sake of those who have been impacted by the appraisal gap, we can only hope these efforts create real change. Understanding the Impact of Home Valuation Process Bias Tai Christensen, DEI Officer of CBC Mortgage Agency, discusses how bias in the home valuation process impacts prospective homebuyers in communities of color. "If there is a bright side, it is the fact that appraisal bias is becoming more widely known and talked about."

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