The issue of appraisal bias — where home valuations can come out differently based on individual traits of a homeowner, such as race or age — is top-of-mind for the federal government. A series of initiatives and policy proposals by the White House, the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) have been made, and specialized task forces have also been stood up by the Biden administration.
Most of those conversations have been oriented around the impacts such bias can have on the traditional forward mortgage industry, but it could also have impacts on the reverse mortgage business. That was the point made at the recent National Reverse Mortgage Lenders Association (NRMLA) Southern Regional Meeting by professionals about the topic.
To get a better idea about how the concept could intersect with the reverse mortgage business, RMD sat down with two of those presenters — Erik Morin, president of Atlas VMS, Inc. and Elly Johnson, principal of All Reverse Pro — to discuss the matter and their presentation.
While the topic has generally gotten more attention on the traditional lending side, informing the reverse mortgage industry of these kinds of issues is an important step just to keep people aware of the broader conversations taking place that might affect mortgage lending on a broad scale, Morin explained.
“I think it’s very common for us in the reverse space to be in our bubble, and there are not a lot of changes to the appraisal process in comparison to what’s happening on the traditional lending side as it relates to the modernization of valuation,” he said. “When you talk about using data and automation in the underwriting decision as a method to identify potential bias, those tools are more utilized in traditional lending, so in my opinion we are ripe for this conversation in reverse. I think it’s very possible that when the ‘appraisal bias’ topic was raised in the room last week, it may have been the first time some people [active in reverse] have heard of it.”
Neither Morin nor Johnson thinks that their presentation or the information in it will solve the issue in any respect, but having the conversation about it seemed prudent in order to spread awareness, Morin said.
“I think we also felt given the fact that the differences between the forward and reverse [mortgage] as it relates to the appraisal process and the collateral risk assessment, that doesn’t exist in the forward side of the world,” Johnson explained. “And so, we felt like it’s extremely important that the loan officers and the lenders explain that process to the borrowers and they get out in front of it.”
One of the most commonly-discussed occurrences related to appraisal bias happened last year, when a Black couple in Maryland aimed to get their home appraised and received an estimated value far lower than they expected.
Having bought their home in 2017 for $450,000 and having invested in modernizations and renovations in the following years, the couple’s first appraisal came back with a valuation of $472,000. Suspecting bias was involved and exhausting remediation options with the lender, the couple then hid their family photos and other paraphernalia that could have indicated their race and asked a white neighbor to be present when a second appraisal was conducted.
When the couple got the results of the second valuation seven months after the first, the estimated value was $750,000, almost 60% higher. Morin, Johnson and Brodsky laid the scenario out in their presentation to the audible surprise of many attendees, they said.
“I actually heard people say after our session, ‘I don’t think I’ve ever been in a session before where a topic was brought up, where people gasped.’ And they did,” Johnson said. “When these examples were talked about, the room was just shocked, because I think many people probably went into this thinking that [appraisal bias] doesn’t exist. We’ve even had people say to us that this is not a real thing. But we needed to drive that point home that yes, it is a real thing.”
The panel also broke down some of the fallout that took place after the discrepancy served as the basis for a lawsuit, including a joint statement of interest by the Consumer Financial Protection Bureau (CFPB) and U.S. Department of Justice (DOJ) that stated lenders are liable for appraisal discrimination. Some organizations, like the Mortgage Bankers Association (MBA), have pushed back on that assertion by the government, and NRMLA attendees also spoke up about that, Johnson said.
“A lot of people said, ‘Well, what do you mean, the lender? We don’t have anything to do with that, we don’t appraise the property. How can we be held responsible?,’” she said. “And the point that I made there was that the CFPB, and [DOJ] both stated to the contrary, mortgage lenders can be liable under [the Fair Housing and Equal Credit Opportunity Acts] for relying on discriminatory appraisals. So, again, we wanted to make that point to everyone that we’re all in this together, and we all have to take responsibility.”
Beginning a conversation to bring the reverse mortgage industry up to speed about this issue will be important going forward, Johnson and Morin said.
