A 4-Step Plan to Address Appraisal Bias

The issue of appraisal bias continues to loom large. Going forward, there is every reason to expect it to be top-of-mind with regulators, the GSEs (Fannie Mae, Freddie Mac and the Federal Home Loan Banks), wholesale lenders, and individual borrowers alike.

At EVP, the question we want to help you answer is how can we be prepared for it?

Step 1: Define It

What is bias? How does one know if he or she is influenced by it? To help us understand the issue, here are some useful definitions from the Department of Justice (“DOJ”):

Bias is a human trait resulting from our tendency and need to classify individuals into categories as we strive to quickly process information and make sense of the world.

With explicit bias, individuals are aware of their prejudices and attitudes toward certain groups. Overt racism and racist comments are examples of explicit biases.

Implicit bias involves all of the subconscious feelings, perceptions, attitudes, and stereotypes that have developed as a result of prior influences and imprints. It is an automatic positive or negative preference for a group… However, implicit bias does not require animus; it only requires knowledge of a stereotype to produce discriminatory actions…With implicit bias, the individual may be unaware that biases, rather than the facts of a situation, are driving his or her decision-making.

DOJ: Understanding Bias: A Resource Guide

Importantly, bias isn’t just about race. Fannie prohibits the:

development of a valuation conclusion based either partially or completely (on any of the following) of either the prospective owners or occupants of the subject property or the present owners or occupants of the properties in the vicinity of the subject property:

  • Sex
  • Race
  • Color
  • Religion
  • Disability
  • National Origin
  • Familial Status
  • Any Protected Class

Step 2: Avoid It

The way to avoid bias is to look for potential signs of it. We use the phrase “signs of it” intentionally because it’s important to not assume the worst. A good example is related to something we’re very proud of, which is our proprietary bias word check software. Every appraisal report is run through this software to check for a list of words to avoid (see similar list from SmartMLS). The results of the word check, however, are not the final, well, word.

For example, the word “white” is in the list, but there are plenty of legitimate uses of that word (e.g. if the street is White Ave). So every flagged word has to be read in context by an experienced reviewer to remove false positives.

For more context and some examples, the following is from Fannie’s list of unacceptable appraisal practices:

use of unsupported assumptions, interjections of personal opinion, or perceptions about factors in the valuation process and the use of subjective terminology, including, but not limited to:

  • pride / no pride / lack of pride of ownership
  • poor neighborhood
  • good neighborhood
  • crime-ridden area
  • desirable neighborhood or location
  • undesirable neighborhood or location

– FNMA Selling Guide: B4-1.1-04, Unacceptable Appraisal Practices (02/02/2022)

Step 3: Fix It

A good example from above that can easily find its way into a report is “desirable / undesirable neighborhood.”  Consider: desirable to whom – Old? Young? Black? White? And why? If there are neighborhood amenities, list them. If home prices are high or properties are selling quickly, that will be reflected in the comps and housing trends. There’s no reason to subjectively opine on a property’s or neighborhood’s “desirability.” List the objective facts only.

Step 4: Learn from It

“Describe the property, not the people.”

The above quote is from SmartDesk, and it’s a pretty amazing summation of how to review the language in a report. If there’s language you’re not sure about, whether your own (as an appraiser) or someone else’s (as a lender or AMC), ask yourself “does this describe the property or the people?” And “people” includes all the people involved – the borrower, the seller, the neighbors, and people “like them.” And people “like you.” Avoid language that describes them or centers them / speaks for them.

Although everyone has implicit biases, research shows that implicit biases can be reduced through the very process of discussing them and recognizing them for what they are. Once recognized, implicit biases can be reduced or “managed,” and individuals can control the likelihood that these biases will affect their behavior.

DOJ: Understanding Bias: A Resource Guide

The bottom line is that all of us have things to learn through this: lenders, appraisers, AMCs. If we all work together we’ll have a better process and an even better experience for borrowers.

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