A scathing report, commissioned by the Appraisal Subcommittee of the Federal Financial Institutions Examination Council and led by the National Fair Housing Alliance, found that the appraisal industry, unlike other sectors of the housing finance industry, has been allowed to govern and regulate itself.
The report emphasizes how impactful the appraisal process is for borrowers, sellers, and every part involved in the transaction. “The appraiser has the power to determine the value of a mortgage borrower’s most important financial asset,” the report states, “which can hold the key to determining whether that borrower’s family can purchase a permanent home rather than rent, access credit on reasonable terms, or build wealth for their family and generations to come.”
The report took issue with the Appraisal Foundation for its lack of inclusivity and diversity enforcement. “Our analysis finds that the appraisal industry has operated in a relatively closed, self-regulated framework,” authors of the report conclude.
The Appraisal Foundation is the nation’s foremost authority on the valuation process, and their boards are responsible for setting congressionally authorized standards and qualifications for real estate appraisers. It is an industry-run, private nonprofit that has a board dominated by appraisers, lenders, bankers, and industry trade groups, yet no one to represent consumers or fair housing advocates. Congress tasked the Appraisal Subcommittee with monitoring and reviewing the Appraisal Foundation, but it has no authority to do so.
That means the majority of the board would have to be industry creditors, and the board would appoint the agency’s rule-writing staff — they would be creditors, too. Not only does this board control the standards of the industry, but also the criteria for entering it. Sounds a bit crooked, doesn’t it? The people who make a living off this profession are also the ones writing all the rules and regulations.
Additionally, the report found that fair housing training programs for appraisers have not been effective enough, considering the persistence of bias in appraisal markets.
The way the industry is currently structured, where most appraisers use the sales comparison approach to assign valuations, is entirely subjective and it only perpetuates racist and classist systems originating in history. The primary role of the appraiser is to provide evidence that the collateral value of the property is sufficient enough to avoid losses for the lender if the borrower is unable to pay off the loan. Although there are several methods of valuation, the GSEs generally require the use of the sales-comparison approach.
Fannie Mae defines this approach as: “an analysis of comparable sales, contract sales, and listings of properties that are the most comparable to the subject property.” Yet, authors of the report point out that GSEs give appraisers broad discretion to determine a home’s value, opening the door to possible explicit or implicit discrimination.
To address this gap in training and requirements, The Appraisal Foundation recently added a module to address the subject of fair housing in the 7-hour continuing education course that appraisers must complete every two years regarding USPAP Standards.
In assessing this module, the report found that it provides an inaccurate summary of fair housing law, while failing to include any content from the applicable statutes themselves (namely, the federal Fair Housing Act) or its implementing regulations. It also fails to provide specific guidance and examples of what is prohibited by law. Instead, the report suggests there to be comprehensive fair housing training included in the initial 15-hour USPAP course.
The report was also critical about various barriers of entry to the profession, such as requiring college degrees and up to 3,000 hours of supervised experience. Although the hours themselves are a significant barrier, appraisers most often find difficulty finding a supervisory appraiser. There are many disincentives for supervisory appraisers, including time, cost, and competition.
