Take race from home-financing equation
The state of the residential home-lending market is like the Nimitz Freeway on a rainy day. But instead of pot holes, truck crashes and a slippery road surface; the home lending market is the byproduct of racial bias, incompetence and greed.
The process starts with a borrower contacting a lender or mortgage broker and providing basic information such as the address, a brief property description and the borrower's financial information. Subsequently, the lender or broker orders third-party reports on the title and property condition, as well as an appraisal which is ordered through an appraisal management company (AMC).
AMCs are third-party administrators who have the responsibility of engaging appraisers, reviewing their work and delivering their reports to a lender. As part of their compensation, they receive 40% to 50% of the appraiser's fee. AMCs are something like air traffic controllers for appraisers and lenders — only most have no idea where the airport is. The AMC hires an appraiser who they may or may not be familiar with and who may or may not be familiar with the market in which the property is located.
If you're a person of color, or someone looking to finance a residence in a racially diverse neighborhood, the odds of being victimized by an appraisal increase dramatically.
Take, for example, the story of Paul Austin and Tenisha Tate-Austin.
After applying for home refinancing, the Austins, a Black family from Marin City, found themselves stuck at the intersection of incompetence and bias. The details are discussed in the new documentary television report, “Our America: Lowballed.”
The Austins allege to have been damaged by a biased appraisal and have filed a civil complaint in United States District Court. Among those named in the complaint are the appraiser and the AMC.
According to the report, the Austins completed extensive renovations to their home, including a completely rebuilt kitchen and bathrooms, additional square footage and an accessory dwelling unit. The renovation produced an attractive buildout which appears to be typical of many homes located in Southern Marin.
During this time period, the Austins applied for refinancing. Their mortgage broker engaged the services of an AMC from Utah. It, in turn, engaged an appraiser from Marin County to appraise the property.
When the Austins reviewed the completed appraisal report, they were shocked. It was alleged to contain language implying that the property would only be marketable to racial minorities, contained irrelevant data and comparable sales which would not be considered comparable by most potential buyers or sellers. Reliance on that appraisal would have caused rejection of their mortgage application.
The Austins requested and got a second appraisal. This time, the inspection tour was led by a White friend of theirs, rather than the Austins themselves. They removed family photos and art from the home, fearful that the second appraiser would discover that they were Black. The second appraisal came in about $500,000 higher than the first. The court may have to decide which appraisal, if either, is accurate.
Lenders created this mess. They invented redlining, gave us the savings and loan crisis, were largely responsible for the Great Recession and, for the most part, have jettisoned in-house real estate appraisal functions in the name of cost reduction.
One fix is to eliminate reliance on specific appraised values which fail to recognize historic, contemporaneous and potential future value increases. Underwriting should consider the appraised value to be the low end of a value range with the upper end factoring in probable property appreciation and principal pay down.
Another fix is to actively recruit people of color to the appraisal field. The appraisal industry is 97% White. Wells Fargo Bank has issued a $5 million grant and is partnering with the Urban League in Philadelphia with the goal of certifying up to 260 diverse appraisers.
Finally, AMCs should not get any of the appraisers fees. Administration of the appraisal function is a lender expense and should not be paid by an appraiser.
This home financing problem can be fixed with smarts and a strong desire to eliminate race, religion or any unrelated nonreal estate or non-financial criteria to the lending equation.