After concerns about racism in home valuations, what will it take to close the $156 billion racial housing deficit?

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Late last year, members of a black North Bay family alleged an appraiser undervalued them by hundreds of thousands of dollars before ‘whitewashing’ their home. It was only after removing personal items and asking a white friend to replace a second appraisal, according to the family’s lawsuit, that the perceived value of the home soared by $487,500.

The case was an extreme example of similar complaints from non-white landlords from Oakland to Stockton to Los Angeles, placing high-priced California at the center of a national debate over how to address concerns about persistent racism in the home evaluation process.

Last week, a new report to federal financial regulators cites the case of the North Bay family in an examination of how racial bias in home valuations has evolved since the explicitly discriminatory housing laws of the last century – and lays out a way forward. potential for reform. Among the recommendations: change the way appraisals are regulated, do more to diversify the ranks of appraisers, and release more federal appraisal data.

As it stands, local fair housing lawyers say the valuation process may amount to a ‘current red line’, due to how non-white residents are still disproportionately excluded from wealth that favorable real estate financing can provide. But it’s only in recent years, the report notes, that more cases like the North Bay family’s have come before the courts and the media.

“It’s not that the problems didn’t exist before,” said Peter Christensen, a lawyer who contributed to the new report to rating regulators. “But the complaints we’re hearing now – that’s the new phenomenon.”

Cases like the one presented by Paul Austin and Tenisha Tate-Austin in Marin City illustrate how high the financial stakes of valuation issues can be in expensive housing markets like the Bay Area. The North Bay couple alleged in a federal fair housing lawsuit last year that their remodeled home had been unreasonably written down by an appraiser originally hired during a refinance.

That is, until the family orders a second assessment, swaps their own photos with those of a white friend, and leaves their home during the follow-up visit.

“The Austins erased all evidence of their racial identity inside their home, even asking a white friend to pose as the owner during the inspection,” according to the lawsuit. “This different appraiser came up with a value of $1,482,500, which is almost half a million dollars more.”

Part of the challenge in addressing concerns like those of the Austin family is that assessments are a technical and subjective activity, which the new report says is largely “self-regulated” and sorely lacking in non-white professionals. A private organization, The Appraisal Foundation, was authorized by Congress in 1989 to set most daily standards. States have their own oversight agencies to clarify localized standards, such as California’s Bureau of Real Estate Appraisers.

The new report was created for regulators on an assessment subcommittee of the Federal Financial Institutions Examination Board, an interagency group linked to agencies including the Federal Reserve, Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau. The valuation report was written by the National Fair Housing Alliance and lawyers focused on fair housing and valuations.

In addition to the rating industry’s unusual regulatory system, the new report explains how the process grew out of the country’s legacy of discriminatory housing policies that relied on an “unfounded association between race and gender.” risk”. A 1967 appraisal manual cited in the report noted that “values ​​change when people different from those who currently occupy an area advance and infiltrate a neighborhood”.

Numerous state and federal laws have since prohibited racial discrimination in housing, and government agencies like the Federal Housing Finance Agency have clarified in recent years that “the racial and ethnic composition of the neighborhood should never be a determining factor. influences the value of a family’s home. “Industry groups, including the Appraisal Foundation, have also pledged to invest in eliminating bias. Still, the new report cites current examples of evaluators injecting racially coded language into reports, such as an unspecified case where a once “white-only” neighborhood was also described as a “white flight red zone” that is now mainly “working”. Black class.

All this has a high financial cost. The Brookings Institution estimates that owner-occupied homes in majority black neighborhoods across the United States are undervalued by about $156 billion. Freddie Mac calculated a 5.2% “appraisal gap” between white and black neighborhoods, where about 12.5% ​​of properties in black census tracts receive an appraised value below the contract price, compared to 7, 4% of properties in white areas.

“The problem was not just about ‘a few bad apples,'” notes the new report. “In contrast, the majority of appraisers surveyed were more likely to show an appraisal gap for properties in Black or Latino census tracts.”

Report contributor Christensen notes that frustration with valuations has been widespread, crossing racial lines, during the surge of COVID-era bidding wars and low-interest refinancing. In busy markets like the Bay Area, it can take weeks to arrange an appraisal, and the results are often difficult for buyers or homeowners to dispute.

The report – the first in a series that is expected to propose further reforms to regulators in the coming months – suggests several ways to both ease pressure and increase fairness. To lower entry barriers to becoming an assessor, the report suggests reviewing requirements for how many hours potential assessors must work and whether they must work under a supervisor who is already well-connected in the field. .

The authors also suggest ways to change the power structure of the governing Assessment Foundation. Suggestions include repealing a financial donation requirement for appointing board members and adding consumer and civil rights advocates to the body. Christensen said policymakers may ultimately go further.

“They’re like, ‘How come this private group of people over there are setting all these rules and standards? ‘” Christensen said. “It’s something that will really be looked at.”

Lauren Hepler is a staff writer for the San Francisco Chronicle. Email: [email protected] Twitter: @LAHepler

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