Biden pressed to go ‘big and bold’ in rooting out housing discrimination

A government-wide push by President Joe Biden to combat disparities in how homes are valued is emerging as a major test of his pledge to narrow the racial wealth gap, with fair-housing advocates saying it may require a significant disruption of the housing market.

Racial inequity in home appraisals is pervasive. According to one study, homes in majority-Black neighborhoods are valued at $48,000 less on average than comparable residences in white neighborhoods, adding up to $156 billion in lost value for Black homeowners.

The disconnect has consequences for the wealth divide, because homes are typically a family’s biggest financial asset and the primary driver of intergenerational wealth accumulation in America.

Biden is enlisting about a dozen agencies — led by the Department of Housing and Urban Development — to recommend solutions, signaling a new sense of urgency to address an imbalance rooted in the legacy of redlining, the historical government practice of labeling Black neighborhoods as “hazardous” and assigning them lower values on appraisal maps. The group is expected to consider new lending regulations, tougher enforcement of fair-housing laws and standards for the appraisal industry.

The biggest challenge Biden’s team will face is deciding how far to go in overhauling the way housing is assessed and valued, with even slight changes carrying substantial repercussions for the $11.8 trillion single-family residential mortgage market.

“When we want to do things big and bold, we do them,” said National Fair Housing Alliance President and CEO Lisa Rice. “If it has a huge impact on the market, so be it.”

The administration’s approach will be an important signal of how serious it is about fighting to end inequities in the economy. Proposed solutions often require reforms of powerful industries and face warnings that they’ll create new economic risks.

Industry groups say they fear that appraisers will be pressured to meet certain price points, echoing concerns that the push could lead to overvaluations that trap borrowers in costly loans and leave them underwater on their mortgages in an economic downturn.

Fair-housing advocates argue that bridging the valuation gap will require a dramatic change in the formula at the heart of the appraisal industry, which calculates a home’s value based on the sales prices of similar homes in the same neighborhood — including neighborhoods that have been undervalued for decades as a result of government-enforced segregation.

“There is concern [about overvaluation], and there are risks, and so we are approaching this with our eyes wide open on that,” said a senior HUD official who requested anonymity. “We want to be sure we have mitigants in place to deal with that and ensure there isn’t massive disruption to the housing market.”

It's unclear that raising the appraised value of a home would enhance its market value. Jim Parrott, who was a senior White House economic adviser under former President Barack Obama, said it's unlikely that boosting appraisal values would be able to outrun a pattern of disinvestment — such as less funding for schools — that contributes to lower demand for homes in certain neighborhoods.

"That’s a deep economic issue we should all be leaning into, but that’s not an appraisal issue,” Parrott said.

Biden is coupling the appraisal push with a proposed $213 billion in new housing spending that he called for earlier this year as part of a $2 trillion infrastructure package. Some of the funds would be set aside for rehabilitating rundown homes in neglected neighborhoods.

The administration's latest housing initiative is zeroing in on a relatively small industry — there are fewer than 80,000 professional appraisers in the country — responsible for a critical piece of the housing finance system. Lenders require mortgage borrowers to obtain appraisals to receive credit, relying on the appraiser to accurately assess the fair-market value of the property that will serve as collateral for a loan. Appraisers are primarily regulated at the state level, with federal banking agencies also playing an oversight role.

Appraisers — 85 percent of whom are white, while just over 1 percent are Black, according to the Appraisal Institute, a trade group — can exercise discretion over which data points to include in their assessments, raising concerns about potential bias.

Researchers from the University of Pittsburgh and the University of New Mexico found in a study published last year that appraisers’ reliance on the sales price of other homes within a neighborhood to assess the value of a property has essentially grandfathered in and perpetuated the effects of old discriminatory policies that discouraged mortgage lending in Black neighborhoods. They said a neighborhood’s racial composition played a bigger role in determining a home’s value in the U.S. in 2015 than it did in 1980, even though the federal government outlawed redlining in 1977 with the Community Reinvestment Act.

“Since no steps were taken to rectify the historic inequities, this approach has enabled such inequalities to persist,” said University of Pittsburgh assistant professor Junia Howell and University of New Mexico assistant professor Elizabeth Korver-Glenn.

Rice, who advocates for fair housing safeguards, wants to move toward a new approach that would determine the value of a home based on what it would cost to construct it — even if it means a dramatic change to the housing industry that could cause big price swings.

“We can’t be stymied by incrementalism,” she said. “The federal government had a huge hand [in residential segregation], and so the federal government is going to have to have a huge role to play in amending and fixing the problem that it helped to cause.”

Lenders are also leery of reducing the role the market plays in the valuation process and say there isn’t a good alternative to assessing the value of a property by comparing it to what buyers paid for a similar home nearby.

“I don’t know how you move away from what a buyer and seller are willing to pay,” said Pete Mills, senior vice president of residential policy and member engagement at the Mortgage Bankers Association. “If we’re saying neighborhoods that have historically been undervalued, we’re somehow going to fix that in one fell swoop — I don’t see how you do that.”

One major concern is that a push from Washington to boost appraisal values for certain homes could lead to appraisers assessing homes at higher values than they’re worth.

Such an overcorrection could hurt the very people the initiative is designed to help, by trapping borrowers in costly loans based on artificially high appraisals. Black home buyers were disproportionately targeted for those loans in the lead-up to the subprime mortgage meltdown, which led Black borrowers to lose their homes to foreclosure at nearly twice the rate of white borrowers when the market collapsed.

Tinkering with the way homes are valued to achieve a policy goal also runs the risk of shaking home buyers' and lenders' faith in appraisals as an accurate measure of a home's worth, which would rattle the mortgage market.

“We want to stress that any proposed changes work not only to remove bias but also maintain safety and soundness in the appraisal process,” said Sehar Siddiqi, director of fair housing policy and valuation at the National Association of Realtors. “Appraisers should not be unduly pressured to meet certain price points if the property and market data do not support the valuation.”

Appraisers are beginning to acknowledge the disparity but also say the focus on their industry is myopic.

“This is an issue with an incredibly complex, deep-rooted history that goes beyond appraisals,” said Rodman Schley, president of the Appraisal Institute, the largest trade group for real estate appraisers in the country. “Solutions will require collaboration across the housing and financial ecosystem.”

The Biden task force is expected to study a range of proposed reforms with input from industry stakeholders, fair housing advocates, state regulators and researchers. The group is slated to begin work next month and report its recommendations within 180 days.

The Consumer Financial Protection Bureau, which regulates lending, is also taking on the issue. The agency on Tuesday will hold a roundtable on racial bias in housing appraisals "and what steps the government can take to address it."