Is Race Baked into Big Data?

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Is Race Baked into Big Data? Who is Regulating Big Data When It Errs?Chicago appraiser and friend (even though she calls me “fancy pants”) writes a stellar explanation of what an appraiser actual does – and what one of the panel experts got completely wrong because he didn’t understand our role in the mortgage process:

Greetings Congresswoman Waters, Chairman Clay, Ranking Member Duffy, Ranking Member Gooden, and the Members of the Housing Subcommittee:

My name is Maureen Sweeney, and I am a real estate appraiser. I grew up in a real estate family and lived through the savings and loan crisis of the 1980’s, which had a profound impact on my life. I witnessed first-hand illegal and unethical behavior in the real estate and mortgage industry towards homeowners. Through that experience, my greatest concern was, “who is protecting the public?”. In 1989, Congress enacted Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). With this decision by Congress, I decided I wanted to be an appraiser. The appraisal profession was and still is the profession in the mortgage industry that promotes and maintains the public trust in housing finance. We are the first profession in the mortgage industry that was licensed, and we are the only profession that is regulated by Congress.

Because of FIRREA, all appraisers who develop opinions of value for federally related transactions must follow the Uniform Standards of Professional Appraisal Practices (USPAP). What was originally intended as assignment conditions for federally related transactions is now partially or fully embedded in all states’ appraisal laws.

USPAP states in the Ethics Rule, “An appraiser must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that the homogeneity of such characteristics is necessary to maximize value.” (Lines 200 – 202, USPAP 2018-2019 Edition © The Appraisal Foundation). The Fair Housing Act of 1968 prohibits discrimination concerning the sale, rental, and financing of housing based on race, religion, national origin, or sex. All states have laws that prevent discrimination. If an appraisal professional basis their assignment results on race, they can lose their license and may go to jail.

Appraisers develop the Valuation Process in each of their assignments. Each step in the Valuation Process builds on the previous step, so at the end of the report, there is a logical conclusion so those who rely in the report can understand how the assignment results came to be. This 8-step process includes:

  1. Identifying the Problem; this includes determining who is the client, who are those who can rely on the assignment results, why is the report needed and how will it be used, what is the effective date of the assignment, what are the characteristics of the property such as the address or legal description, and what are the assignment conditions.
  2. Determine the Scope of Work: this is the type and extent of research and analysis in an assignment.
  3. Data Collection and Property Description: this is the step where appraisers collect data on the market, data on the subject property, and all data on comparable sales and listings that will be used in the report.
  4. Data Analysis: this step includes determining the Highest and Best Use of the property as well as analyzing the market of the subject property. In this step supply and demand are analyzed, inventory levels and marketing times are determined. The data is verified. When appraising for federally related transactions, the closed sales data must be verified through two independent sources, such as the local multiple listing service, the recorder of deeds, or local newspapers.
  5. Site Value Opinion: In this step, the appraiser determines the cost of the land where the property is located.
  6. The Applications of the Approaches to Value:
    a. Cost Approach: this step derives value by estimating the current cost to construct a reproduction or replacement of the existing structure, including entrepreneurial incentives, deducting depreciation from the total cost, and adding the estimated land value. How much does it cost to build the same or similar property? The Cost Approach addresses this question.
    b. Sales Comparison Approach: this is the process of deriving a value indication for the subject property by comparing market information for similar properties with the property that is being appraised. The sales comparison approach is based on the [principle] of substitution, which states that a buyer will not pay more for one property when several similar properties are available; the property with the lowest price will attract the greatest demand. What’s my house worth when compared to my neighbors? The Sales Comparison Approach addresses this question. c. Income Capitalization Approach: this step converts income to value. How much money can I make from this property? The Income Capitalization Approach address this question.
  7. Reconciliation of Value Indications and Final Opinion of Value: in this step the appraiser analyzes the information reported previously in the valuation process and selects a final opinion of value, which may be a value range or a specific number. If the market is oversupplied and prices are declining, the final opinion of value may be on the lower end of the value range. If the market is undersupplied and prices are rising, the final opinion of value may be on the high end of the value range.
  8. Report of Defined Value: this is the last phase of the valuation process. The defined value is stated as of the effective date that was identified in Step 1.

All appraisals have a signed certification. The certification states that the appraiser has personally conducted the appraisal in an unbiased, objective manner in accordance with USPAP. The certification states what the appraiser did or did not do. A signed certification is important because it clearly states the role of the appraiser, thereby clarifying that the appraisal was done by an individual who is impartial, objective, and unbiased. The certification must be signed by the appraiser. Once signed, the appraiser is legally bound to the appraisal.

On June 20, 2019 at the U.S. House of Representatives Committee on Financial Services, Subcommittee on Housing, Community Development, and Insurance at their meeting: “What’s Your Home Worth? A Review of the Appraisal Industry.” Mr Andre M. Perry was one of the five witnesses to testify. Mr. Perry is not a licensed appraiser, yet Mr. Perry concluded that “owner-occupied homes in black neighborhoods are undervalued by $48,000 per home on average, amounting to $156 billion in cumulative losses.” As an appraiser who deals with data, I was very interested in his claim, as well as the basis for his conclusions.

In Mr. Perry’s written testimony, page 2, Figure 1, titled “Neighborhood median home value by black population share”, Mr. Perry data sources were property listings from Zillow and the value estimates provided to the Census Bureau. Mr. Perry did not provide values determined by licensed appraisers or any apparent recognized valuation method or technique. Zillow was sued in Illinois in 2017 (Vipul P. Patel., et al., v. Zillow, Inc and Zillow Group, Inc., Case No. 17 C 4008) and appealed in 2018 (United States Court of Appeals for the Seventh Circuit No. 18-2130). Zillow explicitly points out that Zestimate does not constitute an appraisal and is what it sounds like, an estimate. An estimate is not an appraisal, nor does it resemble any method or technique recognized by Congress or regulators. An appraisal is, “(noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.” (Lines 59 – 60, USPAP 2018-2019 Edition © The Appraisal Foundation).

In his written testimony to your committee, Mr Perry notes on page 2, Figure 1 that the 2016 median list price was provided by Zillow. List price is what a seller is offering their property for sale. List price is not sale price. Sale price is a fact; list price is a suggestion. Rarely do properties in a balanced or declining market sell for above their list price. List price to sale price ratios were not profiled or discussed in Mr. Perry’s study, nor was any final sale price data referenced or profiled. In Figure 1 of his written testimony, Mr. Perry used “Census Bureau” for Median Value, rather than sale price data or appraiser’s conclusions. The Census Bureau is not a valuation agency and obtains their data via a survey. Per the U. S. Census Bureau, the market value is, “the respondent’s estimate of how much the property (house and lot) would sell for if it were for sale.” (https://www.census.gov/quickfacts/fact/note/US/HSG495217). An estimate is not an appraisal. [Homeowners] may or may not know the true value of their properties, because they are not valuation professionals, and they have a personal interest in their property. With only Zillow’s list price data and the Census Bureau’s homeowner estimates of their property’s worth, the study lacks any reliable value indicators. None of this data supports discontinuing the use of individual appraisers in preference for using Automated Valuation Models, as Mr. Perry suggested in his opening statement and throughout the hearing.

Is there a problem with poor and underserved communities in the United States? Yes. Is it the appraisal profession’s fault? No. The systematic practice of redlining (licensed broker issue), loan rejection (lending issue), and property taxes (assessor and county taxing agency issue) have nothing to do with the appraising of real property for federally related transactions. Entire neighborhoods fell victim to predatory lending, subprime mortgages, and mortgage fraud, with most of the mortgage loans generated with loan amounts below the de minimis of $250,000, which made them qualify for appraiser-alternative products, including AVMs. There were a whole lot of non-appraisal related issues presented in Mr. Perry’s data. It’s sad that the label of racism got pinned on the only profession in the mortgage process who is charged with protecting the public trust.

It’s like blaming the canary for the bad air in the coal mine or blaming the mirror for your bad hair day. Appraisers reflect the market; we do not create it. We observe, we verify through credible sources and analyze our data, and we report our findings in a manner that is meaningful and not misleading.

It comes down to data and how the data is collected and analyzed. In his opening statement, final statements, and throughout the hearing, Mr. Perry championed the use of AVMs. None of the data presented by Mr. Perry in his written testimony to this committee supports the discontinued use of individual appraisers over AVMs. This presents a question: since Mr. Perry relied on data from AVMs and Zillow, is race baked into these systems and their data? Algorithms and machine learning are built on historical data, which is primarily human driven. Machines may and have been shown to amplify bias in data. If racism has been perpetuated for decades in real estate, then it’s baked into the system and the data, therefore what kind of data will we get from the machines? Some hope that Big Data will save us from the mistakes made by humans. The humans who provide valuation services are licensed by their individual states and regulated by Congress. The licensed humans can lose their licenses, get heavily fined, or go to jail for unethical or incompetent appraisal practices. Who’s regulating Big Data when Big Data makes mistakes?

Today we know that 85% to 90 % of all mortgage transactions backed by the federal government and U.S. taxpayers are currently not subject to the protections Congress enacted through Title XI. Big Data companies that provide AVMs are not regulated. Their valuation process and sources of information are not verified, regulated, or publicly available. How does relying on an unregulated private industry running aggregation models protect the public trust? I don’t believe it does.

The appraiser is central to the checks and balances in the home lending system. The appraiser is hired by the lender to ensure that there is value in the property being used as collateral by the lender to provide funds to the borrower. The licensed broker/Realtor negotiates the price of the property, but they are not qualified or licensed to determine the value. Providing valuation services is the appraisal professional’s job. The appraisal professional provides checks and balances in the housing system, as the appraiser is entirely unrelated to the transaction and is not paid based on the amount of the valuation nor contingent on the closing of any loan.

Public trust is key in promoting the stability in the housing market. The continued reliance of unregulated aggregators and bifurcated products continues to erode the public trust at the expense of discarding the profession specifically intended to promote the public trust. How does this protect the public? The appraisal profession is at risk with this policy change. More important: the public is at risk with this policy change and the continued lack of reliance of the appraisal profession.

David Bunton from The Appraisal Foundation said it best to this committee: “The last thirty years were witness to federal agencies doing their best to circumvent using these trained professionals. Likewise, the government sponsored enterprises are taking on riskier practices that leave appraisal protections on the sidelines. Through exemptions, appraisal waivers, promoting evaluations in lieu of appraisals, and encouraging lenders to use unlicensed individuals, the federal financial institutions regulatory agencies estimate that a mere 10 to 15 percent of all mortgage transactions backed by the federal government and U.S. taxpayers are currently subject to the protections Congress enacted through Title XI. ”

I ask again: How does relying on an unregulated private industry running aggregation models protect the public trust? It doesn’t. The reliance on Big Data, the acceptance of hybrid and bifurcated appraisal reports, the potential rising of the de minimis from $250,000 to $400,000, and the lack of hiring the profession that is charged by Congress to promote and maintain the public trust in the housing industry, is a bad direction for our industry and our country. Please do all in your power to protect the citizens of the United States and prevent the next housing crisis.

Thank you for your time, your service, and your continued interest in protecting the public trust.
Maureen Sweeney

Jonathan Miller

President & CEO at Miller Samuel Inc.
Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts.
Jonathan Miller

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Jonathan Miller

Jonathan Miller

Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts.

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12 Responses

  1. John Gazsi on Facebook John Gazsi on Facebook says:

    Amen, undervalued by who relatively.

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  2. Avatar Eric West says:

    Brilliantly written. Thank you Maureen!!

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  3. Avatar Alan says:

    Remove Mr Perry’s Testimony..

    It has no Basis here.

    Reply simply stating

    Remove Mr. Perry’s Testimony (nothing more)

    Lets gets hundreds to state such if not thousands here. Keep is short keep it simple let that panel know were we stand as appraisers…

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  4. Avatar Cotton cornell says:

    Fake racism is the new political agenda. Its sad that it has made its way into our profession. There are way to many politicians and activists who make alot of money promoting the presence of of racism however there are no real examples just fake racist hoaxes. I consider Perry and the bookings company to be a racist hate group who are promoting their hateful agendas. If they really wanted to end racism they would abolish laws that give privileges to a certain group of people. These laws divide us. We are all Americans and should be treated equally!

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  5. Avatar TruthBTold says:

    Yes, this all reflects what I was thinking while watching this guy’s testimony. He never mentioned “purchasing power”, which is the main reason like-kind properties vary dramatically between compatible market areas. Currently, in my city, neighborhoods with ideal metro locations with beautiful homes, are receiving offers @ 10% or more above the list price. Most of these homes are occupied by people of color that moved into these areas as a result of “white-flight” back in the early 1960’s. Now that the traffic and commute situation has become unbearable, people who can afford to offer more than the list price, are willing to do so without comps to support that price. Most of these people happen to be white and see this transitional trend occurring. This disparity in purchasing power and/or preference to live amongst your own race is the result of many other historical factors, and far beyond the scope of an appraisal!

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  6. Avatar Certresid says:

    Outstanding rebuttal. Observation of the hearings I got the impression the purveyors of the big data machines desperately needed a sword to hang their hats on. Using the racial card and alleged Appraiser racial biases was sure to get Perry invited as a panel speaker given today’s political sensitivity towards racial discrimination.

    I’ve no doubt Someone somewhere from the big data lobby took Perry to lunch at a very expensive restaurant and whispered in his ear.

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  7. Avatar Realrose says:

    Very well-written assessment of what Mr. Perry used to support his assertion that appraisers are racist and our conclusions are biased! That he is in favor of getting rid of our profession, in favor of secret algorithms that promise accuracy, smells of someone using a Black man to further their selfish interest. Reminds me of when Bush had Colin Powell testify that there were weapons of mass destruction in Iraq, and we haven’t been out of there since their shock and awe campaign!

    Now that our job has become politicized we better step up to the plate and participate in letter writing campaigns that target the people who make decisions in Washington. We all know our jobs better than a programmer who is a non-appraiser, so we need to protect our role in the public trust we have been carrying on our backs since we became licensed and now enslaved by AMCs which were put in there by politicians and they were way off on who crashed the economy, and it wasn’t appraisers!

    We have become an easy scapegoat for interested parties (banks, realtors, fannie and freddie, wall street and insurance companies that cover losses of wall street brokers) and they are all gambling with our future. They are using hybrids and calling them appraisals but they are prepared by spineless and desperate appraisers who are helping bring the cost of a “valuation” essentially a transfer of the appraisal fee to the banker and the process of a loan can be literally instant, but I don’t think people will like the outcome! Remember, when they start with new, creative or otherwise financing that cuts corners, well, they are engineering a new bailout and playing with other people’s home and their family’s security. The investor class will pick up the properties foreclosed and there will be another increase in the homeless on the street and their heads will spin at how fast they lost everything!

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  8. Avatar dale bailey says:

    Great write up!

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  9. Avatar Tom Horn says:

    Well said, Maureen.

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  10. Well Said indeed….Where is Mr. Perry now? He should be required to answer the questions in reference to his “report” back in front of the same committee members that this started in front of at the hearing.

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    • Avatar Realrose says:

      Joseph you got to the crux of the matter! These non-appraisers who accuse us of racism need to show all their data and work; that will give us a chance to interpret what is in his report and we should absolutely make him explain and that is nothing more than what we are asked to do in each of our appraisals, SUPPORT YOUR CONCLUSIONS! A blanket statement that appraisers are all racist is obviously false, but I still contend that some interested party asked him to produce a “made as instructed” study that would make us look bad. I assume a lot here, but no trained appraiser would make such a statement; we are much too thoughtful because we are always worried what we say will be questioned. I do way more than is necessary in my reports to document and support what I conclude, and that is after 40 years in this profession. When I can, I explain like a teacher so they understand what we know instinctively. We don’t make up the sales! We reflect the market, and if people pay less on the west side of the highway as opposed to the east side, only if the neighborhoods are competitive with similar homes do we use sales on both sides of the highway, we are not the ones red lining, it is banks!

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  11. Baggins Baggins says:

    It’s obvious what will happen and what the unintended consequences of these changes to the lending industry will be.

    “We’re from the government and we’re here to help.”

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Is Race Baked into Big Data?

by Jonathan Miller time to read: 10 min