‘Preference Falsification’ – Why Licensees Parrot Notions They Know Are Untrue
- Fannie Seeks Upstanding Invisibles for Long-Term Commitment - January 31, 2023
- Why Are Fannie, Freddie Peddling Exotic Junk-Rated Risk Swaps? - January 13, 2023
- FTX Bought Government’s Silence; Did Fintechs Buy Attacks on Appraisers? - December 23, 2022
People who live under authoritarian regimes rarely reveal their true feelings. They get used to lying. Parroting the party line becomes second nature in oppressive societies. It’s not a reflection of one’s moral compass but a survival mechanism.
In his book “Private Truths, Public Lies,” Timur Kuran, an economist and political scientist at Duke University, writes about this disconnect, known as “preference falsification.”
Preference falsification is dangerous because it lends an air of permanence to structures that are brittle and susceptible to sudden collapse. Kuran believes that when the support of a policy, tradition or regime is contrived, a seemingly minor event will trigger massive, unanticipated change.
Preference falsification has had a hand in supporting the caste system in India and race-based college admissions in the United States. It has been found to corrupt the way people talk to their physicians, to muddy U.S. foreign policy and, now, to potentially inflate U.S. home valuations.
The phenomenon is making itself felt among the nation’s 80,000 licensed real property appraisers whose already weakened, overregulated profession has been targeted anew by the easy-money crowd – lobbies for groups and industries that want all gatekeeping functions removed from government-backed mortgage lending. Preference falsification has resulted in some appraisers parroting talking points they know to be untrue.
At issue is a caustic narrative that piggybacks on the culture wars playing out elsewhere in American life. The contrived controversy holds that a financial analyst’s skin color precludes the analyst from properly valuing an asset owned by someone of a different skin color. This new strawman – known as “appraiser bias” – holds that white appraisers hopelessly undervalue properties owned by African-Americans, despite findings to the contrary by the U.S. Federal Reserve and the American Enterprise Institute. HUD Secretary Marcia Fudge is one of the many government officials who have been peddling this poison. You can view the cabinet secretary’s remarks here. The narrative has been used to delegitimize the long-established economic principle of substitution – the bedrock of the sales comparison approach to value.
No appraiser seems to have ever encountered this white whale – the deranged colleague who appraises a building on a sliding scale in accordance with the skin color of its owner. It’s the boogeyman.
Experienced appraisers know that when bad actors have infiltrated the valuation process in mortgage lending, they have invariably acted as rubber stamps, inflating collateral values to make deals work. This is where the regulatory spotlight has been aimed in the past and where it needs to be aimed again.
But the sheer outlandishness of the narrative has not stopped sensible people from accepting this received wisdom. Under the onslaught, some appraisers now parrot the new orthodoxy knowing its core tenet is, in a word, nuts. In those cases, it’s pure preference falsification.
In the best of times, appraisers inhabit a scary, litigious world. Most run mom-and-pop businesses. As if it couldn’t get worse, they have now been set upon by agenda-driven nonprofits, disgruntled borrowers working with public-interest law firms, lenders looking to offload risk and pandering politicians and bureaucrats in two branches of the federal government. Those who inhabit the C-suites at Freddie and Fannie are also more than happy to promote this strawman as they circle the wagons around their bonuses.
“The notion of ’Appraiser bias’ is a canard that has been promoted to discredit and ultimately eliminate an important bulwark in the determination of collateral value,” said author Jeremy Bagott. “Appraisers have been buffeted by these claims since about 2018. They seemed to come out of the blue. The claims are based on a criticism no appraiser recognizes.”
Now, under social pressure, some appraisers have begun succumbing to the phenomenon of preference falsification as the thing has become weirdly normalized. It’s right out of Aesop’s Fables.
Sylvia Karasu M.D., a clinical professor of psychiatry at Weill Cornell Medicine in New York, looked at the effects of preference falsification in how patients respond to the standard pain-ranking question asked by physicians.
In a recent article in Psychology Today, Dr. Karasu cites the case of a woman suffering from the excruciating pain of cancer. When asked to provide a number between 1 and 10 to describe her level of pain, she carefully formulates her response each time — does she want to appear “wimpy” or “stoic”? Does she want to obtain more pain medication or keep the higher dose for later when the pain becomes unbearable? Should she rate the pain as less intense this week, as a morale-booster for her physician and to encourage the latter to not give up on her?
Those who study preference falsification as it relates to foreign policy are currently eyeing China and Iran, where widespread protests have recently erupted. Preference falsification has been the norm in these countries for decades. Will it reach critical mass this time? they ask themselves.
Kuran has examined preference falsification in the context of the fall of communism in Eastern Europe in the late 1980s. As it turned out, the countries of Eastern Europe were primed for open revolt, but it was impossible to know this so long as their citizens falsified their preferences. He also faults the phenomenon for sustaining India’s caste system and tamping down healthy debate on affirmative action in the United States.
Since appraisers are increasingly hesitant to speak up about what they know to be true, the thoughts remain impounded in the mind of each individual. An unintended consequence is likely an extreme reluctance to conclude a value that risks souring a transaction.
The Polish-born American psychologist Solomon Asch conducted experiments in the 1950s that demonstrated the tendency of members of a minority to yield to the majority, even when the majority is wrong. He found people were willing to ignore reality and give an incorrect answer in order to conform to the rest of the group.
In an August 2021 report, the U.S. Federal Reserve – an entity least likely to be captured by lobbyists for the banks, nonbank lenders, fintechs, homebuilders and Realtors – looked for signs of racial discrimination in mortgage approvals using new data. It found no signs of discrimination. Disparities in application rejections could be controlled for when socio-economic factors considered. But it did find Black and Hispanic applicants tended to have disproportionately greater loan debt – “leverage” in the report – than white or Asian applicants. There are many open questions associated with this finding, which cannot be properly ventilated so long as industry influencers engage in preference falsification.