​​Key Takeaways 

• Examples of overt references to race, ethnicity, and other prohibited bases under federal fair lending laws in appraisals and other property descriptions persist, indicating the continued presence of valuation bias.
• Ongoing failure to address appraiser consideration of prohibited factors like race, as indicated by prohibited basis commentary within the free-text form fields of appraisals, may result in valuation bias.
• ​Market participants must ensure that appraisals and other property valuations are compliant with fair lending principles, including in free-form text commentary. Appraisals are to be fair and free of bias, providing a supported value for a family’s future or current home that reflects respect and equal treatment of the community and neighborhood in which the home is located.

In December 2020, FHFA issued a Request for Information (RFI) on Appraisal Related Policies, Practices, and Processes to gather input on how the Enterprises can improve the appraisal process. The RFI requested information on:

• Appraisal modernization;
• Uniform Appraisal Dataset (UAD) and the design of appraisal forms;
• Automated Valuation Models (AVMs) and appraisal waivers; and
• Valuation differences by borrower and neighborhood ethnic makeup.

Since the RFI, FHFA's Office of Fair Lending Oversight has engaged in information exchange with industry professionals and other federal stakeholders on valuation bias issues, needs, and best practices. By reviewing data, appraisals, and other property valuations, FHFA can better undestand valuation bias.

FHFA is a participant in the interagency Property Appraisal Valuation and Equity (PAVE)​ taskforce. In our review of appraisals, we have observed references to race and ethnicity in the "Neighborhood Description" and other free-form text fields in the appraisal form. FHFA is sharing examples of these observations for public transparency and to assist others with fair lending compliance. Institutions and other market participants should be aware that the discretionary nature of the free-form commentary is a key risk factor that requires appropriate risk mitigation.

The Enterprises are also assessing and identifying valuation bias, to inform the public on this important issue:

• Fannie Mae published a blog expressing their commitment to reducing bias. More recently, they provided a detailed and informative Appraisal Update Newsletter as a reference for industry professionals focused on avoiding “problematic" phrases and code words that could indicate underlying bias.
• Freddie Mac began studying whether minorities are more likely to receive an appraisal that is lower than the contract price. The preliminary results suggest that 12.5 percent of homes appraised in Black communities were valued at less than the contract price compared to 7.4 percent of homes in white neighborhoods and as 9.4 percent of homes in Latino areas.

Appraisals and Inequality

As we consider how to best address bias in appraisals and other valuations, we must first acknowledge and understand the inequalities that exist now between Black and white households (Figure 1). White households are overwhelmingly wealthier than Black households. Homes in Black neighborhoods tend to be valued less when compared to similar homes in white neighborhoods. Lastly, the 78,000 member appraisal workforce is overwhelmingly white and male.

​FIGURE 1: Appraisals and Inequality

Compliance Requirements

FHFA's main goal in addressing valuation bias is ensuring compliance with federal fair lending law, the Fair Housing Act, the Equal Credit Opportunity Act, and the Safety and Soundness Act. One way to assess fair lending compliance is to review free-form text fields. The appraiser uses discretion when describing a neighborhood. Generally, the use of discretion can present fair lending risk because it allows overt or indirect references to race, ethnicity, or other prohibited bases to enter the process and can be applied unequally to favor or disfavor neighborhoods based on race or other prohibited bases.

The Uniform Standards of Appraisal Practice (USPAP) states that "[a]n appraiser must not perform an assignment with bias" and "[a]n appraiser must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value."

The Uniform Appraisal Report (URAR) provides in the neighborhood section of the form that "Race and the racial composition of the neighborhood are not appraisal factors." An appraiser certifies upon completing the URAR that "I did not base, either partially or completely, my analysis and/or opinion of market value in this appraisal report on the race, color, religion, sex, age, marital status, handicap, familial status, or national origin of either the prospective owners or occupants of the subject property or of the present owners or occupants of the properties in the vicinity of the subject property or on any other basis prohibited by law."

However, references to race and ethnicity persist in the commentary sections of present-day appraisals. FHFA has decided to release this limited information concerning our review to inform the public and support improvements in industry practice.

What We Observed

From millions of appraisals submitted annually, a keyword search resulted in thousands of potential race-related flags. Individual review finds many instances of keywords to be false positives, but the following are examples of references when the appraiser has clearly included race or other protected class references in the appraisal.

The racial and ethnic composition of the neighborhood should never be a factor that influences the value of a family's home. Our observation of appraisals suggests that racial and ethnic compositions of a neighborhood are still sometimes included in commentary, clearly indicating the writer thought it was important to establishing value.

Examples of racial and ethnic references we found in appraisals include:

• The percentages of racial and ethnic makeup of the area.
  
• e.g., "The racial makeup of the city was 86.28% white, 12.46% Black or African-American, 0.52% Native American, 0.22% Asian, and 0.52% from two or more races. 0.56% of the population were Hispanic or Latino of any race."
• Foreign birthplaces of residents noted as part of the neighborhood descriptions.
• e.g., "The county was 94.85% white, 0.19% Black or African-American, 0.83% Native American, 0.74% Asian, 0.07% Pacific Islander, 1.36% from other races, and 1.96% from two or more races. 3.73% of the population were Hispanic or Latino of any race. 19.4% were of German, 13.2% English, 11.4% Irish and 9.1% American ancestry."
• The languages spoken in an area.
• e.g., "The most common language spoken is English. Other important languages spoken here include Italian and Spanish."
• Amenities specifically geared to a race, ethnic, or religious group.
• e.g., a "commercial strip featuring storefronts supplying Jewish Households."
• Rising house prices were because of gentrification.
• A town was described as having a "Black race population above state average."
  
• Noting that "Koreatown is considered 'highly diverse' ethnically," listing the percentages of residents from various races and nationalities and describing that the number of foreign-born persons was “considered high compared to the city as a whole."
• The ethnic groups that have immigrated to a neighborhood over the course of many years and noted it was "one spicy neighborhood."
• A reference to a neighborhood being originally "White-Only," before becoming a "White-Flight Red-Zone" to explain why the neighborhood is mostly "Working-Class Black" now.
• A neighborhood described as "predominately Hispanic" and that the residents have "assimilated their culture heritage" into the neighborhood.
• A neighborhood populated by African Americans characterized as leaving an "overcrowded" area for "greater housing opportunity" in the neighborhood.
• Noting that "there is more Asian influence of late" buying the market.
• Noting the area's first Asian mayor.
• Noting an area's "decline in population, which transitioned from being predominately Eastern European to having a substantial amount of Black and Hispanic people."
• Describing that the subject property was in a "racially integrated neighborhood" but "the community has no large institutional anchor" comparable to other racially integrated neighborhoods noted in the city.
• An area that was "originally founded as a whites-only city or sundown town" but had become "fairly diverse" with a "diverse school system."
  
• An area that was "'not especially-diverse' ethnically, with a high percentage of white people." 

Next Steps

There is likely not a single solution to neutralizing discrimination and discriminatory practices in property valuation. FHFA and other agencies are exploring many ways to combat appraisal bias, including increased transparency and awareness and more training and education. Market participants could benefit from guidance and best practices to improve commentary and provide more objective free-form text narratives. By updating industry norms on the type of neighborhood information that is appropriate to include and moving neighborhood descriptions away from the examples we shared above, we can begin to establish more equitable assessments that ensure fair and unbiased property valuation for all. 

Correction: On February 22, 2022, FHFA revised this blog post to remove an example incorrectly identified as coming from an appraisal. The example came from a non-appraisal property evaluation reviewed by FHFA.