AEI's Critique of Freddie Mac’s Research Note on “Racial and Ethnic Valuation Gaps in Home Purchase Appraisals"

[CGinMN]

Executive Summary:​

While we applaud Freddie Mac for having undertaken an effort to assemble relevant data to investigate the topic of appraisal discrimination, it was premature to publish a note based only on “exploratory research” limited to a single race-based correlation, with no attempt to present a rigorous analysis regarding other potential explanations. Merely stating that low appraisals resulted in “substantial appraisal valuations gaps” for minority versus White tracts provides an ominous sounding headline, but sheds little light on whether the gaps support a claim of systemic racism. Even worse, Freddie Mac’s research note was quickly seized by policymakers and the media as evidence of systemic racism.[1]

Rather than being due to racial discrimination by appraisers, we found Freddie’s claim of an “appraisal gap” is much more likely the result of would-be first-time buyer inexperience, socio-economic status (SES), or government actions (in particular a concentration of FHA lending in certain census tracts) with a disparate impact on protected classes.

Our analysis, which goes well beyond Freddie Mac’s “exploratory research”, can explain around 86% for Black tracts and 32% for Latino tracts of the gap through differences in socio-economic status (SES), leverage, and borrower characteristics. With the full set of controls, the Black gap disappears entirely, while the Latino gap falls by almost half.

In a robustness test, we found a sizeable FHA effect for majority White or White-only tracts. Thus, FHA lending, but also Equifax Risk Factor (ERS) and the one adult borrower share, is not simply substituting for minority borrowers.

Finally, research ignored by Freddie Mac has found a substantial consumer benefit to low appraisals:

Low appraisals provide enormous leverage to renegotiate the contract to a lower price. When buyers do renegotiate, subsequent to a low appraisal, they usually lower price by a significant share of the difference between contract price and appraised value. The new lower price reduces credit risk, costs to the borrower, and ultimately results in greater wealth for the buyer.[2]

If the differences found by Freddie Mac are in fact, as our research indicates, largely due to factors such as differing rates of FHA financing and SES in the grouped census tracts, then addressing wealth inequities through the use of easier lending criteria and accommodative monetary policy create a systemic barrier to sustainable homeownership and wealth creation by subjecting protected class households to risky lending, unsustainable price boosts, speculation in land, and home price volatility as other AEI Housing Center research has shown.[3] These polices are a violation of the FHFA’s (and HUD’s and the CFPB’s) obligation to Affirmatively Further the Goal of Fair Housing. Thus, instead of Freddie Mac’s correlation being the result of systemic appraiser racism, it may well have been the result of government policies and actions which have a disparate impact on protected classes.

We respectfully submit the following comments in an effort to highlight the above deficiencies and report on our research into other explanatory factors. We believe that our research could be quickly confirmed. We trust that this critique will help inform Freddie Mac, FHFA, policy makers and the public on this important topic.[4]

Full report here:

AEI Housing Center Critique of Freddie Mac’s Note on “Racial and Ethnic Valuation Gaps in Home Purchase Appraisals”

The AEI Housing Center finds that contrary to recent analysis by The markup/Associated Press, HMDA data on purchase loans do not show evidence of systemic discrimination by the mortgage lending industry when accounting for risk-adjusted loans.

www.aei.org

 

[Terrel L. Shields]

I believe it is mere "Wokeism" to quote James Carville, to presume guilt and cause without even a good superficial examination of all the data and to assure the public that the data and conclusions are not, themselves, suspect.

 

[Tom D]

why exaggerate the facts when 'feelings' count for more.

 

[George Hatch]

I fail to see how reporting "this is what we're seeing so far" is a problem. It seems to me that the longer it goes without Fannie and Freddie and HUD publishing ANY of their findings the more deafening their silence is.

I daresay that IF it comes to pass that the preliminary summary (this is what the outcomes were) breaks one way and the more detailed analysis (this is how that outcome occurred) breaks the other way that might help bridge the gap in understanding between what the non-appraisers think they see vs what the appraisers are actually doing.

I'll be interested to see how this plays out, because every example I've seen so far that involved the 2-3 appraisals with different conclusions involved basic competency issues on either the high appraisal or the low appraisal and in at least one example on both sides. Garden variety errors like selecting 2bd comps because the subject is reported in public records as 2bd instead of selecting 3bd comps because the subject actually had a permitted 3rd bedroom addition. That kind of error isn't attributable to racism, it's motivated by sheer laziness because the appraiser didn't want to take the time to make a 2nd trip out the area to take more comp pics.

 

[Overimprovement]

I fail to see how reporting "this is what we're seeing so far" is a problem. It seems to me that the longer it goes without Fannie and Freddie and HUD publishing ANY of their findings the more deafening their silence is.

I think the issue is partial reporting contributes to the cancerous wokeism that is engulfing this nation. When we write a report, we don't stop halfway and say, "well after a cursory look at some possible comps, I think market value will be 'X'. We write and then submit the ENTIRE report. This is similar to the old 'comp check' days. Do a little, so we can draw a full conclusion on whether this dog will hunt or not.

Well, the hounds have been officially unleashed now.

 

[Mejappz]

Here is the full report from people who know what there talking about.

AEI Housing Center Critique of Freddie Mac’s Note on “Racial and Ethnic Valuation Gaps in Home Purchase Appraisals”

The AEI Housing Center finds that contrary to recent analysis by The markup/Associated Press, HMDA data on purchase loans do not show evidence of systemic discrimination by the mortgage lending industry when accounting for risk-adjusted loans.

www.aei.org

 

[George Hatch]

I think I would characterize the situation as Freddie knows what they ended up to the extent of their analysis, which was most likely less extensive than what subsequent studies will be able to do. They took that very necessary first step.

 

[CGinMN]

Why design a study that doesn't even attempt to control for obvious/know differences that will impact these appraisal gap outcomes? What is the value of this?

In the section titled "What causes the appraisal gap?" Freddie doesn't mention any of the factors that were obvious to AEI and other critics, such as socioeconomic status and loan type.

Whether it was their intent or not, they have perpetuated a narrative that further erodes public trust in appraisers. That bothers me, as it should every practicing appraiser.

 

[George Hatch]

Freddie isn't an appraisal entity. They have their own *** to cover.

I'm just urging a little restraint here before we get to swallowing this flavor of Kool-Aid because it appeals to our own perspectives. There will be other critiques and studies being performed using these datasets, so lets just stand back and wait to see how it all shakes out. In the meantime we still can try to do better for ourselves regardless of how the conclusions turn out.

Forewarned (we're watching you) is forearmed.

 

[Mejappz]

Why design a study that doesn't even attempt to control for obvious/know differences that will impact these appraisal gap outcomes? What is the value of this?

In the section titled "What causes the appraisal gap?" Freddie doesn't mention any of the factors that were obvious to AEI and other critics, such as socioeconomic status and loan type.

Whether it was their intent or not, they have perpetuated a narrative that further erodes public trust in appraisers. That bothers me, as it should every practicing appraiser.

Because they need to keep their sugar daddy happy.