HUD Enhances Protections Against Appraisal Bias

The U.S. Department of Housing & Urban Development (HUD), through the Federal Housing Administration (FHA), has taken a new step in the Department’s work to protect borrowers from racial or ethnic bias in home appraisals. FHA’s new requirement for lenders participating in its single-family program as outlined in Mortgagee Letter 2024-07 will enable borrowers to request a re-assessment of the appraised value of their property if they believe that the appraisal was inaccurate or biased.

The Reconsideration of Value policy represents months of collaboration with the Federal Housing Finance Agency (FHFA) to develop an aligned approach for both FHA-insured mortgages and those purchased or guaranteed by Fannie Mae and Freddie Mac (the GSEs).

“We know that biased home appraisals not only disproportionately harm homeowners of color, but stunt economic opportunity for the communities we serve,” said HUD Acting Secretary Adrianne Todman. “Today, we are announcing a new step in our work to root out racial and ethnic bias in home valuations, which will give borrowers greater ability to have their home valuation reconsidered.”

Rooting out bias

Today’s announcement fulfills a commitment of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), made up of leaders from 13 federal agencies, to establish a transformative set of recommendations to root out racial and ethnic bias in home valuations.

“Consistent standards for lenders and appraisers, coupled with a well-understood process for consumers to challenge appraisal findings, will help ensure that consumers are treated fairly,” said FHFA Director Sandra L. Thompson. “These updates represent a powerful tool in combatting racial bias in property appraisals and promoting valuation accuracy.”

Effective for FHA case numbers assigned on or after September 2, 2024, FHA policy contained in its Single-Family Housing Policy Handbook 4000.1 will include an updated Reconsideration of Value section with new guidance on borrower initiated reconsideration of value requirements.

These updates include requirements for transactions in both single-family forward and Home Equity Conversion Mortgage (HECM) programs. FHA’s new policy requires lenders to disclose to borrowers that they may request a reconsideration of value with instructions that explain the process, including what information will be required from a borrower and the expected Reconsideration of Value processing times. These disclosures must be provided at both the time of mortgage application and at the presentation of the appraisal.

For lenders, the new policy includes:

  • A requirement that underwriters be trained to identify and remedy appraisal deficiencies, including racial and ethnic bias;
  • Requirements for lenders when receiving, processing, and communicating the status of the reconsideration of value requests initiated by a borrower;
  • Standards for lender quality control of appraisal reviews and reconsiderations of value; and
  • Standards for appraisers to respond to requests from lenders for a reconsideration of value review.

Further promotion of appraisal equality

“Appraisal bias harms homeowners of color at every stage of homeownership, and it can lock in inappropriately lower values for entire neighborhoods,” said Federal Housing Commissioner Julia Gordon. “Our new policies will arm homeowners, lenders, and FHA with a clear process to address biased or inaccurate appraisals.”

Over the past few years, HUD has strengthened its Nondiscrimination Policy, Appraiser Conduct, and other FHA Roster Appraiser requirements in Handbook 4000.1 to promote equity in the appraisal process and ensure appraisals for insured mortgages are performed in a competent, independent, impartial, and objective manner, free of discrimination and compliant with Uniform Standards of Professional Appraisal Practice (USPAP), including the Competency Rule.

Under these requirements, the appraiser must comply with applicable laws including anti-discrimination laws and the Fair Housing Act, among others. The appraiser is prohibited from basing any part of the appraisal analysis or reporting on certain factors, including race or other protected characteristics of the prospective or current homeowner, prospective or current occupants of the home, or occupants of properties in the vicinity of the property.

FHA requires that a potential Fair Housing violation or instance of discrimination to be reported to HUD’s Office of Fair Housing and Equal Opportunity (FHEO).

HUD’s actions were met with praise from the industry as a means to further enhance consumer protections and enforce anti-discrimination measures.

“We applaud HUD and the GSEs for establishing this process so consumers can more readily obtain a second look at appraisals when they disagree with them,” said Bryan Greene, VP of Policy Advocacy for the National Association of Realtors (NAR). “It empowers consumers while affording appraisers an opportunity to make sure they got it right. NAR has long advocated for updating the ROV process, seeing it as crucial to ensuring fair housing in the appraisal process. We are encouraged by HUD and the GSEs taking this significant step to support consumers nationwide.”

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Picture of Eric C. Peck

Eric C. Peck

Eric C. Peck has 25-plus years’ experience covering the mortgage industry, most recently serving as Editor-in-Chief for National Mortgage Professional Magazine. He graduated from the New York Institute of Technology, where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books, and has served as Copy Editor for Entrepreneur.com.
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