Racial Bias by Appraisers Is Uncommon & Not Systemic
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On January 4, 2021, the American Enterprise Institute (AEI) published a study titled “ “. They concluded allegation that knowing the race of the applicant results in racial bias by appraisers on refinance loans is uncommon and not systemic. This same analysis supports the conclusion that unintentional bias based on race is also uncommon and not systemic.
- Recent examples in media (NYT, Denver News Channel 7, or Chicago Sun) show cases of appraisal 1 coming in an average of about $126,000 or 25% lower than appraisal 2.
- These claims of bias were all based on an allegation that a human appraiser was aware of the applicant(s)’ race either from a meeting or photos or other items in the home which indicated race and as a result, the appraiser underestimated the property’s value.
- The implications of these three stories are that intentional and perhaps unintentional appraisal bias is commonplace and the valuation gaps are large.
- We use the following data:
- Collateral Risk Network’s (CRN) survey of Appraisal Management Companies and Lenders,
- Home Mortgage Disclosure Act (HMDA) data on denial rates, and
- National Housing Market Database consisting of:
- Public records data, Automated Valuation Models, National Mortgage Risk Index using agency loan data, including use of appraisal waivers, and HMDA data.
- Here we examine the gap within the each group between the Refi human appraisal and the Waiver.
- Whites with a human appraisal get 0.8% lower value than Whites with a refi waiver and this result is highly statistically significant (at 1% level).
- Whites serve as the control group because their appraisals should not be biased and the Waiver is in theory color blind.
- Blacks with a Refi human appraisal get 1.4% lower value than Blacks with a refi waiver appraiser. However, this result is not statistically significant at the 5% level, with a confidence range of +0.3% to -3.2%.
- The difference between the White and Black groups is 0.6%, basically the same as for the AVM and the Pair approaches.
- This result further supports our conclusion that intentional and unintentional racial bias by appraisers on refinance loans is uncommon and not systemic.
Needless to say, we agree with their conclusion!