TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1491913
34 | M R EP O RT FEATURE A house is often a person's largest asset. Similarly, owning a home is often an individual's greatest source of wealth. According to the Local Initiatives Support Corporation (LISC), homeownership is the primary way that low- and moderate-income families build wealth and achieve financial sta- bility. Homeownership is not only important for building wealth for the current generation but also foundational for passing on wealth to future generations. This is one of the many reasons why the appraisal valuation pro- cess is now under the microscope and being investigated to ensure fairness for all property owners. Why Are Appraisals Important in Lending? I n the lending process, the value of the home is critically import- ant. Lenders want to know a bor- rower's income and their ability to repay the loan, their credit score, and the current property value, which determines the amount of equity in the home. All these fac- tors determine the overall risk of the loan and will have an impact on the borrower's interest rate and monthly payment. During the market crash over a decade ago, most headlines were about home "overvaluation." Roughly one-half of the loans being created then were cash-out refinances. Borrowers were look- ing to leverage as much equity as possible. Often borrowers were allowed to take so much equity out of their home that it put them in a negative equity position. Combining negative equity with an adjustable-rate loan (pushed by subprime lenders), followed by a real estate market correction, resulted in widespread home de- preciation and the "perfect storm" that helped drive the real estate market crash of 2008. Today, the mortgage world is very different. Appraisal bias and "undervaluation," is dominating the headlines. The Brookings Institution's study, "Racial Disparities in Home Prices Reveal Widespread Discrimination," cited several examples of racial bias, including the following: "In Denver, a Black family in a white neighborhood was looking to make renovations and sought an appraisal for a refinance loan. The home value came in at $405,000, using comparable sales in a Black- majority neighborhood different than the neighborhood they lived in. A second appraisal was done after removing all indicators of race. That appraiser used compa- rable properties within their own neighborhood. The property was appraised at $550,000." "In San Francisco, a Black family invested $400,000 into their home for major renovations. After the work was completed, an appraisal came in with only an increase in value of $100,000 over the pre-renovation value. After removing all indicators of race, a second appraisal was completed and produced a home valuation that was $500,000 more than the pre-renovation value." What Can Be Done to Prevent and Identify Potential Bias? T he issue of racial bias in valuations is not new. The appraisal process is meant to be unbiased. However, there contin- ues to be examples of bias in the appraisal and lending industry. The good news is there are technological advancements and proactive leaders in the industry working together to combat bias. The PAVE (Property Appraisal and Valuation Equity) Task Force was commissioned by President Biden to evaluate "the causes, extent, and consequences of appraisal bias and to establish a transformative set of recommen- dations to root out racial and ethnic bias in home valuations." A few of the PAVE recommen- dations include the following: » Develop data-sharing arrange- ments among all relevant government agencies and By the Numbers Addressing the issue of appraisal bias is critical. Here's what can be done to identify and prevent this problem. By Jeffrey Hogan, SRA, AI-RRS