A former head of the Government National Mortgage Association (Ginnie Mae) is calling on Congress and regulators to modernize the appraisal process rather than allowing it to flounder.
“At a time when we should be accelerating reform, given the advanced data and technology tools available to the industry, we are stagnating,” Alanna McCargo writes on the Urban Institute’s website.
McCargo, who served during the Biden Administration, notes that an interagency task force meant to promote fair and accurate appraisals has been disbanded by the Department of Housing and Urban Development (HUD), “stalling progress, collaboration and transparency.”
She says the current appraisal process needs improvement, “as it hasn’t kept pace with market changes, larger data availability and new technologies.”
McCargo supports a measure introduced by Sen. Raphael Warnock (D-GA) that mandates public disclosure of property-level appraisal data and standardizes consumer rights to appeal appraisals they believe are unfair or incorrect.
But while the legislation would go a long way toward increasing transparency and market accountability, McCargo wouldn’t stop there. She would also remove the contract price from appraisals.
“One of the most straightforward ways policymakers could improve appraisal accuracy is by prohibiting the disclosure of the negotiated sales contract price to appraisers before they have completed their independent valuation,” she writes.
“This change would directly address any influence a sale price has on the appraised value and would align residential mortgage practices with the collateral risk and valuation practices prevalent in commercial lending and insurance sectors.”
“Anchoring bias” is introduced when appraisers know the contracted sales price in advance, the former GNMA president argues. That “effectively tethers the home’s valuation to the deal rather than to objective market evidence.”
“Multiple research studies have shown that appraisals frequently come in with a value equal to or just higher than the contract price. This reality raises concerns that valuations essentially confirm transactions rather than independently evaluate properties’ value, weakening the integrity of the valuation and creating more risk throughout the mortgage ecosystem.”
Inaccurate appraisals have lasting effects, McCargo points out. Undervalued homes can prevent families from obtaining loans, hinder wealth building and depress surrounding property values. Overvalued homes can inflate local tax burdens, create appraisal gaps for future buyers and contribute to broader market distortions.
“In both cases, ‘mis-valuations’ can perpetuate inequality and reduce long-term neighborhood stability,” she says.
McCargo writes that the mortgage business already has “powerful tools” at hand to modernize the valuation process. And these tools, not the agreed upon price, “should form the foundation of any valuation from an expert.”
Sen. Warnock’s Appraisal Modernization Act could accelerate the use of these tools through its proposed advancement of data transparency and appeal rights. And other new approaches also offer promise, she writes. These include:
- Value acceptance (appraisal waivers). Offered by Fannie Mae and Freddie Mac, these waivers forgo the need for a full appraisal when sufficient data support the estimated value. They can significantly reduce transaction costs and time for qualified borrowers.
- Property data collection. The independent collection of home characteristics by trained data collectors, separate from appraisers, can be used by appraisers to inform desktop valuations, increasing efficiency and lowering consumer costs. Separate data collection can be particularly valuable in areas with a shortage of appraisers.
“Although these alternative tools can reduce anomalies, normalize valuations and reduce consumer costs, the housing market still needs the judgment of licensed professionals,” McCargo writes. “AVMs cannot assess property condition nuances, and data collectors cannot make final valuation calls. Human insights and expertise remain especially critical in diverse, older or atypical housing markets.”
In what the former Ginnie Mae official says is a “very helpful step,” Fannie Mae and Freddie Mac and the Federal Housing Finance Agency (FHFA) have published more comprehensive valuation data and tools for lenders and appraisers, improving consistency and transparency across the industry.
Now, she goes on, policymakers can build on that progress and embrace data in appraisals to promote accuracy, fairness, and trust. “Rather than retreat, Congress, regulators, and housing agencies should strengthen these reforms by removing undue influence, standardizing best practices and embracing modern data, technology and process efficiencies.”
But eliminating the disclosure of the contract sales price and suppressing its inclusion in final appraisal reports is key, McCargo emphasizes.
“Ultimately, buyers and sellers deserve confidence that the value placed on a home is fair, impartial and based on market evidence, not anchored to a deal price,” she argues.
“Appraisers deserve protection from implicit or explicit pressure to confirm a negotiated price. Given that buying a home is often the largest financial transaction in a person’s life, confidence and fairness in the valuation process should be non-negotiable.”
