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Regulators proposed two changes this month for how banks and other mortgage lenders should approach collateral valuation. One calls for lenders to create quality control standards and mechanisms for
At face value, the proposals address topics for which the industry has long needed clarification, said Jonathan Miller, a New York-based appraiser. But, he noted, the full scope of the government's actions will put undue pressure on appraisers to submit reports that align with borrower expectations.
"These actions show an intense interest to solve the problem, but I think the devil is in the details," Miller said. "The basis of all this is an underlying assumption that the second value on a property is always right if it's a higher value, so the byproduct of these efforts has the potential to cause appraisers to over-appraise to avoid legal jeopardy."
Others, meanwhile, say the proposals are a necessary first step toward righting historical wrongs in the real estate market.
Marisa Calderon, chief of community finance and mobility at the National Community Reinvestment Coalition, said the appraisal process needs to be revamped to shed practices that perpetuate race-based biases that favor majority-white neighborhoods and disadvantage majority-minority ones. The bias, she argues, is baked into the way appraisers are trained.
"The reality is the systems and structures are themselves, in some cases, problematic. Even when appraisers follow the intended approach, it may result in an outcome that disenfranchises people," Calderon said. "They could be doing everything in a way they feel is consistent with the approaches they've learned and for which they're certified, but there are some underlying issues that need to be addressed."
The biggest wedge between the two world views is the proposal put forth by the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, National Credit Union Administration and Consumer Financial Protection Bureau this month regarding how appraisals can be challenged — a process known as a reconsideration of value, or ROV.
Parties involved in a real estate transaction have long been able to challenge the value opinion of appraisers. In some instances, appraisers say, this can be helpful in avoiding glaring oversights, but often it results in the tedious extra work of assessing sometimes dozens of additional properties. The proposed rule change would require banks and other mortgage lenders to have formal processes for considering ROV requests for both issues of bias and general errors.
One critical change called for in the proposal would allow lenders, borrowers or other related parties to suggest comparable properties from outside a property's immediate neighborhood. Fair housing advocates see this as a way to level the playing field between historically disadvantaged communities and their more affluent neighbors. Appraisers say it divorces the appraisal process from one of its most critical components: land value.
"The idea that one location next to a nuclear power plant is exactly the same as one that's not, that there's no location preference because the houses look the same — that's not valuation," Miller said. "That is something completely different."
Typically, when picking comparable properties, appraisers will avoid crossing certain boundaries, such as highways, parks or other physical divides that demarcate specific neighborhoods. The thought is that such separations shape the desirability of an area, along with proximity to good schools and employment opportunities. But Calderon argues that such practices fall in line with discriminatory practices of the past.
"Dispensing with the artifice of those borders that are made by people — and which, in some cases, help to advance and sustain the kinds of impacts of redlining and historic discrimination — can be a way of addressing the valuation issue that exists between undervalued homes in Black neighborhoods and homes that are, in many cases, valued more highly in primarily white neighborhoods," she said.
Craig Steinley, president of the Appraisal Institute, said the proposal missed an opportunity to expand opportunities for borrowers to bring forth relevant information before an appraisal is completed. He pointed to a Department of Veterans Affairs protocol as a worthy model.
"The Veterans Administration's Tidewater Initiative is a protocol that deserves acceptance throughout the industry for its pro-consumer benefits, and it should be included in the final rule," he said.
The other proposal rolled out by the Fed, FDIC, OCC, NCUA and CFPB similarly calls for lenders to form best practices around the use of automated valuation models, which are computer programs that generate appraisals based on data inputs. Reform advocates see this as an overdue modernization for the field, while appraisers view it as a threat to their occupation.
The two proposals from regulators this month are the latest in a string of actions by government agencies to address perceived racial biases in the appraisal process. The issue rose to national prominence two years ago after several reports of Black homeowners having their properties appraised substantially higher after using white stand-ins during appraiser walkthroughs.
In June 2021, the White House formed the Property Appraisal and Valuation Equity, or
Various other incremental changes have emerged from government agencies during the past two years, starting with a guidance from Fannie Mae about "problematic phrases" appraisers should avoid in their valuation reports and blog posts from the CFPB. In recent months, efforts have escalated to more formal guidance and legal action.
In March, the CFPB and the Justice Department
Cumulatively, these actions are creating an environment in which it is harder for appraisers to give unvarnished opinions on property values, California-based appraiser Jeremy Bagott said, an outcome that he said puts both lenders and borrowers at risk.
"Both sides of a transaction can equally be upset with you from time to time. If that's happening, you are doing your job right. You're not making any friends," he said. "A lot of appraisers can live with being disliked, but those same appraisers can't live with being called racist or accused of discrimination. That's where it will have a chilling effect on free speech."
Jed Mayk, a partner and mortgage lending and servicing expert at the law firm Hudson Cook, said the proposed rules demonstrate how much the conversation around appraisal regulation has changed during the past 15 years.
Following the subprime mortgage crisis in 2008, a bevy of new requirements and restrictions were incorporated into the Dodd-Frank Act of 2010 to ensure appraisers were not unduly influenced by lenders, real estate agents or other parties to inflate a property's value to juice commission and fees. Now, the focus is on ensuring appraisers don't undervalue properties.
During a webinar on Tuesday, Mayk said he's concerned the proposed rules are too sweeping, and could undermine the appraiser independence that Dodd-Frank sought to protect.
"This issue has bubbled up because of concerns about discrimination, but the regulatory approach to this is broader than that, and it's covering anything that could lead to, possibly, an improperly understated valuation of a property," he said "There's a real tension there that I think can be reconciled, but it's not as easy as I think the regulators may be thinking at this point."
