AEI Research Critique of Freddie Mac’s Misleading Appraisal Gap Report

A.E.I Research Critique of Freddie Mac's Misleading Appraisal Gap Report. More great research from AEI. This is an analysis of Freddie Mac’s misleading and basically defamatory paper on Appraisal Gap. When government related entities release misleading information like this they are attacking and defaming real estate appraisers. The hate real estate appraisers have received because of this paper and Andre Perry’s paper is relentless.

Another problem with releasing misleading data and conclusions is that it actually hurts the people they are trying to help. Facts show that the real cause of the wealth gap between blacks, whites and Latinos is the income gap. It has nothing to do with appraisals or appraisal gaps. The government needs to help blacks, Latinos make more money. Offering help with down payments and reduced fee loans will not help these people long term. They end up in risky financial situations where they are more likely to lose their home. This causes more damage than not helping them at all. The government is setting these people up for failure which is a travesty. As noted in the report below

“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.”

Full report linked below.

AEI Housing Center Critique of Freddie Mac’s Note on “Racial and Ethnic Valuation Gaps in Home Purchase Appraisals” January 2022

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.2

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 85% for Black tracts and 29% 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. 3

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.4 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. 5


Mary Cummins
Image credit flickr - Giulia Forsythe
Mary Cummins

Mary Cummins

Mary is a certified residential appraiser and has been in real estate since 1983. She is licensed by the California Office of Real Estate Appraisers. She was an agent and broker licensed with the California Department of Real Estate selling residential income, commercial buildings, raw land and homes for Merrill Lynch Realty in Beverly Hills and Westside Properties in Los Angeles before concentrating on appraisals.

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6 Responses

  1. Kathy Morton Bunting Hoey on Facebook Kathy Morton Bunting Hoey on Facebook says:

    This is a great Critique! If they were really interested in resolving the issues, they would address the concerns in this article and address the issues with AMC’s selecting the cheapest and least educated & trained appraisers for each job, irregardless of training, experience and geographic knowledge, so they can keep the bulk of the payment for themselves. This AMC money grab was never the intention of Dodd Frank and has left the lenders and consumers holding the bag with low quality reports and all the good appraisers who have spent years understanding and reporting on markets standing around waiting for work with C & R fees. The damage the AMC’s have done to our profession are immeasurable. The committee should be looking at the actions of the AMC’s and the race to the bottom it has created in terms of the quality of reports it produces rather than creating a bias blame game. From looking at it all, it appears that the goal is just to move to AVM’s and the like and to dump the Appraisers who have dedicated their careers to protecting the consumer and lenders. PAVE is a house of cards built on lies and disinformation. No one spoke to the actual appraisers and ever asked what the issues are.

  2. Baggins Baggins says:

    Can someone please tell me what exactly is wrong with lower housing prices? The movement to force everyone into higher priced housing should end. The government bureaucrats continue to systematically advocate higher prices and higher taxes for everyone.

    • Avatar steve says:

      Hey Baggins…i think you answered your own question…” Higher taxes for everyone “..

      • Baggins Baggins says:
        Fed recap.

        The ongoing spanish inquisition into appraisers personal lives… Ignore the 10,000 gorilla in the room.

        They’re looking at the data all wrong with their own observational bias.

        None of these yahoos has apparently considered the possibility that in minority areas where appraisers have verifiably stopped more deals with lower valuation opinions, is a likely consequence of the realty community behaving in a predatory fashion and clipping these groups up for exploitative deals. The appraiser is the only one stopping this and they won’t have it, it’s time to stop protecting certain segments of consumers so well. Equity!

        Your tax dollars, hard at work.

        I’m seeing the effects of uncontrolled lending allowance pass throughs and long periods of instant approvals already with some of these foreclosure orders. I’m looking at a 2000 year built super simple double wide, by the oil fields, having appreciated 330k in 10 years, from previous reo valuations around 70k, group movement of these units now at 400k or there abouts, taking a 25% dive and that’s just for starters. Who knew those depreciating boxes represented the highest appreciation segment of real property possible? If the people living there would just move 10 miles west, they’d get a real stick built for a lower price tag, a safer environment, more land.

        The bubbles have not just blown up, they are like really consequential. I avoid some areas not because of the demographic specifically, but rather the obvious financial ignorance and obviously predatory agents whom haunt the areas. Not coincidentally it’s a high volume minority migrant section of town. I used to try to help people and just enraged agents with annoying comparisons like actual web links illustrating how I could buy that exact same and better manufactured home, less any depreciation, brand new from the factory floor for 150k. With a follow up that so you’re telling me the fifth acre lot by the oil fields is worth $250k land value? They don’t like that talk but thankfully for the borrowers, they are insulated from my service questions because they don’t speak english. I never went back and only go to these areas for foreclosures. Not coincidentally, the defaults are where you might imagine they would be.

        The move for higher home values in minority tracts is synonymous with the ibuyer and hedge fund investors wanting higher profits on both sides of the deals. As these entities now speculate in residential housing and have special purchasing deals set up with GSE’s where they buy bulk volume defaulted units at special discounts, given first purchase opportunity ahead of everyone else. Or they hold them for rentals which causes artificially high rental prices and ongoing artificially high market values. The more distressed homeowners there are, the more acquisitions these companies make. Equity! The thing to do with appraisers is to make sure the public has someone to blame.

        • We know they are looking at the wrong data, but it is intentional. The studies themselves are completely biased and unscientific. This is called Confirmation Bias, and don’t think for a minute no one understands whats going on here. They do.


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AEI Research Critique of Freddie Mac’s Misleading Appraisal Gap Report

by Mary Cummins time to read: 3 min