Rooting out bias in home appraisals

At Clear Capital, our core purpose is to improve people’s lives, and to enable accurate financial decision making for properties through the use of modern analytics, technology and valuation products. We believe that property valuation plays a key role in the mortgage finance industry and also in the health of neighborhoods and communities. Putting people first means that anything preventing homeowners and families from moving forward confidently is worth our time to understand and take action. This especially applies if there is a potential of racial bias.

When it comes to bias in the industry, we are individually responsible for confronting our conscious and unconscious tendencies and determining whether or not we are perpetuating inequity. Everyone has the power to conduct their own research and self-assessment.

There are many communities that feel the impact of years of unequal policies and continue perpetuating the concern that those impacts exist. We must take responsibility for identifying warning signs of bias and for our own blind spots.

In the midst of ongoing discussions on how to better leverage analytics and digitize the home inspection process, there are some clear actions that we can take to reduce bias in the mortgage industry, starting with increasing diversity in the appraisal profession.

As part of an initiative to increase diversity among appraisers, the Appraisal Institute (AI) trade organization has partnered with Fannie Mae and the National Urban League to strengthen the Appraisal Diversity Pipeline Initiative.

This program connects minority communities to the valuation profession and leverages scholarships from the AI Education and Relief Foundation. Fannie Mae and the other sponsors announced the “first class of 2021 aspiring real estate appraisers receiving scholarships through the Appraiser Diversity Initiative.” AI President Rodman Schley noted that there have been “reports of bias in real estate values, and while it is painful to read about it in the press, it has allowed the Appraisal Institute to be a leader in the space and identify any problems that may exist.”

A 2015 study of Harris County Tax Appraisal District data highlighted the risk of bias in home appraisals due to the prevailing composition of the industry itself —
and its inherent lack of diversity.

In 2020, the conversation within the appraisal industry intensified. The focus on social upheaval and racial equity only helped to raise awareness of the issue. Social media amplified experiences of discrimination and touched the hearts and minds of millions. This is the first time we have tools that are able to deconstruct bias in an objective way — leveraging structured data, machine learning and cloud-based computing to audit valuation models for potential bias.

Congress is considering legislation, the Real Estate Valuation Fairness and Improvement Act of 2021 (H.R. 2553), to establish a task force to examine policies and identify any specific cause disparities, and to examine any barriers to entry limiting diversity in the appraisal profession. We support the legislation’s intent to have a discussion around racial disparities in valuation.

Appraisal bias should be explored in three forms: systemic, implicit and explicit. Systemic bias could be built into the market because of historical policies and practices, so inherently, it would be embedded deep inside the data we all rely upon for both automated models and human-based valuations. Implicit bias could occur if appraisers’ use of accepted practices further isolates neighborhoods and homeowners. And explicit bias transpires if the appraisal process is guided by the skin color of the property owners.

The path forward
We must all work together to correct these risks. We must increase diversity among appraisers and industry participants — something like what the National Association of Minority Mortgage Bankers of America (NAMMBA) has set out to achieve.

First, appraisal businesses should employ more people who resemble the homeowners. Secondly, makers of property analytics need to take a look at the risk of systemic bias being hardwired into market data. Data science teams can increase neutrality within their automated valuation models and mitigate the risk of "algoracism." AVMs need to be evaluated to determine if they are discerning when they factor metrics like comparable selection, data quality and data availability. Checks and balances are important, but they should be a part of a holistic approach to valuation accuracy.

Finally, the inspection process can be digitized to increase the standardization, fidelity and objectivity of data collection. Not only will this support alternative valuation methods, including hybrid appraisals, but will also reduce any chance of unconscious bias by increasing data fidelity and reducing assumptions.