Biden urged to go ‘big and bold’ in ending housing discrimination
WASHINGTON – Government-wide pressure from President Joe Biden to tackle disparities in how homes are rated appears a major test of his commitment to closing the racial wealth gap, fair housing advocates claim that this could require a significant disruption of the housing market.
Racial inequality in home valuation is pervasive. According to a study, homes in predominantly black neighborhoods are valued at $ 48,000 less on average than comparable homes in white neighborhoods, representing a loss of value of $ 156 billion for black homeowners.
The disconnection takes its toll on the wealth divide, as homes are typically a family’s biggest financial asset and the primary driver of intergenerational wealth accumulation in America.
Biden appeals to a dozen agencies – led by the Department of Housing and Urban Development – to recommend solutions, signaling a new sense of urgency to address an imbalance rooted in the legacy of redlining, the historic practice government of calling black neighborhoods “dangerous”. And assigning them lower values on the evaluation cards. The group is expected to consider new lending regulations, stricter enforcement of fair housing laws and standards for the appraisal industry.
The biggest challenge the Biden team will face is deciding how far to go in overhauling the way housing is valued and appraised, even small changes that have substantial implications for the single-family residential mortgage market. $ 11.8 trillion.
“When we want to do big and bold things, we do them,” said Lisa Rice, President and CEO of the National Fair Housing Alliance. “If this has a huge impact on the market, so be it. “
The administration’s approach will be an important signal of the seriousness of the struggle to end inequalities in the economy. The proposed solutions often require reforms of powerful industries and face warnings that they will create new economic risks.
Industry groups fear appraisers will be forced to stick to certain prices, echoing fears the surge could lead to overvaluations that trap borrowers in expensive loans and leave them underwater on their mortgages in a downturn economic.
Fair housing advocates argue that closing the valuation gap will require a radical change in the formula at the heart of the valuation industry, which calculates a home’s value based on the selling prices of similar homes in the city. the same neighborhood – including neighborhoods that have been undervalued for decades due to government-imposed segregation.
“There are concerns [about overvaluation], and there are risks, so we are approaching this with our eyes wide open to that, ”said a senior HUD official who requested anonymity. “We want to be sure that we have mitigation measures in place to deal with this and to make sure there is no massive disruption in the housing market.”
It is not clear that increasing the appraised value of a home would increase its market value. Jim Parrott, who was a senior White House economic adviser under former President Barack Obama, said the increase in valuation values is unlikely to exceed a divestment model – such as a decrease in funding schools – which contributes to a drop in the demand for housing in certain neighborhoods.
“It’s a deep economic problem that we should all be looking at, but it’s not a valuation problem,” Parrott said.
Biden associates the valuation push with a $ 213 billion new housing spending proposal he requested earlier this year as part of a $ 2 trillion infrastructure program. Part of the funds would be set aside for the rehabilitation of dilapidated houses in neglected neighborhoods.
The administration’s latest housing initiative focuses on a relatively small industry – there are less than 80,000 professional appraisers in the country – responsible for a critical part of the housing finance system. Lenders require mortgage borrowers to get appraisals for credit, relying on the appraiser to accurately assess the fair market value of the property that will serve as collateral for a loan. ready. Assessors are primarily regulated at the state level, with federal bank agencies also playing a supervisory role.
Reviewers – 85 percent of whom are white, while just over 1 percent are black, according to the Appraisal Institute, a professional group – can exercise their discretion over which data points to include in their reviews, which raises concerns about potential biases.
Researchers at the University of Pittsburgh and the University of New Mexico found in a study published last year that appraisers’ reliance on the sale price of other homes in a neighborhood to assess a property’s value has essentially preserved and perpetuated the effects of old discriminatory policies that discouraged mortgage lending in black neighborhoods. They said the racial makeup of a neighborhood played a bigger role in determining a home’s value in the United States in 2015 than in 1980, even though the federal government banned redlining in 1977 with the Community Reinvestment Act.
“Since no action has been taken to rectify historic inequalities, this approach has allowed such inequalities to persist,” said Junia Howell, assistant professor at the University of Pittsburgh and Elizabeth Korver-Glenn, assistant professor at the University of Pittsburgh. ‘University of New Mexico.
Rice, who advocates for fair housing guarantees, wants to evolve into a new approach that determines the value of a home based on what it would cost to build it – even if that means a sea change in the housing industry. housing that could result in high prices. oscillations.
“We cannot be blocked by incrementalism,” she said. “The federal government had a huge hand [in residential segregation], and therefore the federal government is going to have to have a huge role to play in modifying and solving the problem it helped to cause. “
Lenders are also reluctant to reduce the role of the market in the appraisal process and say there is no good alternative to assessing a property’s value by comparing it to what buyers have paid. for a similar house nearby.
“I don’t know how you get away from what a buyer and seller are willing to pay,” said Pete Mills, senior vice president of residential policy and member engagement at the Mortgage Bankers Association. “If we say neighborhoods that have been historically undervalued, we’re going to sort of solve this problem all at once – I don’t see how you do that.”
A major concern is that a push by Washington to increase the appraisal values of certain homes could lead appraisers to appraise homes at higher values than they are worth.
Such overcorrection could harm the very people the initiative is designed to help, by trapping borrowers in expensive loans based on artificially high valuations. Black homebuyers were disproportionately targeted for these loans in the run-up to the subprime mortgage meltdown, leading black borrowers to lose their homes to foreclosure at nearly twice the borrower rate. white people when the market collapsed.
Tinkering with how homes are valued to achieve a policy goal also risks undermining the confidence of buyers and lenders in valuations as an accurate measure of a home’s value, which would shake up the mortgage market.
“We would like to stress that any proposed changes work not only to remove bias, but also to maintain the safety and soundness of the assessment process,” said Sehar Siddiqi, Director of Fair Housing Policy and Assessment. at the National Association of Realtors. “Appraisers should not be unduly forced to adhere to certain prices if property and market data does not support the appraisal. “
Reviewers are starting to recognize the disparity, but also say the focus on their industry is myopic.
“This is an issue with an incredibly complex and deeply rooted history that goes beyond appraisals,” said Rodman Schley, president of the Appraisal Institute, the nation’s largest professional group of real estate appraisers. “Solutions will require collaboration across the housing and financial ecosystem. “
The Biden task force is expected to study a range of proposed reforms with input from industry stakeholders, fair housing advocates, state regulators and researchers. The group is expected to start work next month and present its recommendations within 180 days.
The Consumer Financial Protection Bureau, which regulates loans, is also looking into the matter. The agency will hold a roundtable on Tuesday on racial bias in housing evaluations “and the steps the government can take to address it.”