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

Mary Cummins

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


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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3 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.


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

by Mary Cummins time to read: 3 min