HUD proposes remedy to reduce appraisal bias

The Department of Housing and Urban Development is taking tangible measures to wrangle appraisal bias by giving Federal Housing Administration loan applicants the opportunity to challenge a property valuation.

It is proposing to update the FHA's reconsideration of value (ROV) process by including an option for borrowers to request another appraisal if they believe the original's results are skewed by racial bias.

ROV's can already be initiated by a prospective borrower, but the process is in need of clarification, HUD said in its draft mortgagee letter. It is looking to include specific guidance to process and document a borrower-initiated review of appraisal results. 

Borrowers will also have an option to obtain a second valuation "in cases where material deficiencies in the appraisal are documented and the appraiser is unable or unwilling to resolve them," which may include instances of illegal bias,  HUD said.

Feedback from the industry will be accepted until Feb. 2. 

HUD Secretary Marcia Fudge discussed the proposed changes at a Brookings Institute event Thursday, noting that the department is "committed to making the appraisal process fair nationwide."

"We must eliminate bias in home valuations so that everyone can equally reap the benefit of wealth — and intergenerational wealth — that come along with homeownership," said Fudge in a written statement. "This announcement is an important step forward in rooting out appraisal bias in this country."

Changes to the ROV process were first mentioned in HUD's road map for addressing appraisal bias, also known as the PAVE Action Plan, and highlighted the importance of providing clear guidance for borrowers seeking to challenge an appraisal.

The draft mortgagee letter published in early January "supports the Biden-Harris administration's PAVE Action Plan commitments and the continued work of the interagency task force," the department said in a press release.

The interagency task force, whose mission is to eliminate bias in residential valuations, is spearheaded by HUD, but includes a bevy of other federal agencies including the Department of Veterans Affairs, Department of Agriculture, Consumer Financial Protection Bureau, Federal Trade Commission and the Federal Deposit Insurance Corporation. 

Even with the formation of the task force, so far regulatory enforcement and changes to the appraisal process have been fairly sparse. Industry stakeholders continue to believe that more must be done to combat appraisal bias.

In October, the Federal Housing Finance Agency moved to make Uniform Appraisal Dataset records by the government-sponsored enterprises public.

"We view this as a significant first step in sharing the vast amount of valuation data that's retained by the enterprises," Sandra Thompson, president of FHFA, said while speaking at a Mortgage Bankers Annual convention last year. "With the more than 23 million statistics about single family home appraisals, the public will be able to better monitor industry trends, compare appraisal gaps in minority neighborhoods across states and metropolitan areas, evaluate national state, regional and local trends in appraised values and gain a better understanding for how appraised values differ among neighborhoods and housing features."