March 17, 2021
House Committee on Financial Services
3340 O’Neill Federal Building
Washington, D.C.
Re: Real Estate Valuation Fairness and Improvement Act of 2021
Dear Chairwoman Waters and Representative Green:
We write to support the Real Estate Valuation Fairness and Improvement Act of 2021. This bill addresses issues of racial equity in the procedures and techniques used to value residential real estate. It also directs money to historically Black colleges and universities for the purpose of training more appraisers of color.
This bill is necessary because there are indications that homes owned by people of color are not being valued fairly and that historic redlining is still harming communities of color. People of color are also significantly under-represented in the appraisal field. These problems likely result from the lingering consequences of institutional racism, current bias by individual appraisers, under-representation of people of color in the appraisal industry, and new automated valuation models (AVMs) that may incorporate biased assumptions.
In addition to funding appraiser training, this bill will require the relevant appraisal regulators and entities to cooperate on necessary research into the causes of racial disparities in real estate valuation.
While traditional appraisals are the best known valuation tool, other methods are allowed and are becoming more popular. These include computer systems known as automated valuation models (AVMs), hybrids combining the work of a fully qualified appraiser with a nonappraiser or AVM, and ill-defined “evaluations” permitted by federal bank regulators.
Real estate valuation is critical to the sale, financing, and taxation of homes across the nation. Banks need accurate valuations for safety and soundness reasons. Insurers, guarantors, and investors need to know how much properties are worth to protect their assets. Municipalities depend on accurate valuation for assessment and budgeting purposes. And consumers need to know the true value of a property when buying, selling, or mortgaging a home.
A valuation that is too high or too low can have serious, practical consequences for consumers, especially those in communities of color:
Entire neighborhoods may be undervalued, preventing entire communities from
growing wealth and discouraging outside investment.
Potential buyers may refuse to purchase and lenders may refuse to finance a home
if the valuation does not support the home price.
If an appraisal undervalues a home so that lenders refuse to finance it, the buyer
may be driven to a more expensive and risky land-installment or rent-to-own
contract.
A lender might make an incorrectly low bid at a foreclosure auction, causing the
homeowner to owe a larger deficiency.
Undervaluation may lead homeowners to sell for less than their home is worth.
Loan applicants may be offered a rate that is too high or charged for unnecessary
mortgage insurance because the lender mistakenly believes the loan will have an
LTV over 80%.
Undervaluation may also prevent homeowners from refinancing, thereby missing
out on lower interest rates or be prevented from making needed repairs.
Overvaluation may discourage potential buyers from purchasing a home in the
mistaken belief that their down payment is too small to achieve the necessary LTV.
Buyers may be tricked by speculators flipping overvalued dilapidated properties or
developing shoddy new construction for sale at huge markups—leaving buyers
unable to sell or get a loan for repairs.
A distressed homeowner may be denied a loan modification entirely because an
inaccurate AVM leads the servicer to believe that foreclosure is better for the
investor. Or the AVM may negatively affect which modification programs the
borrower is evaluated for. Notably, the Enterprises have different loan modification
rules for loans below 80% LTV. Such loans are not eligible for interest-rate
reductions or principal forbearance.
A homeowner may find herself underwater after purchasing an overvalued home. If
the homeowner later wants to sell to avoid foreclosure or take up a new job, doing
so will be difficult or—for most people—impossible.
A high LTV is also associated with an increased risk of foreclosure—which harms
both the homeowner and the investor.4
Homes and entire neighborhoods may be overvalued for property tax purposes,
draining wealth from a community.
As this list illustrates, home buyers, sellers, and owners have just as much interest in getting an accurate valuation as do other, larger industry participants. The real estate industry is a multibillion dollar component of the American economy and accurate valuations are a critical underpinning. This bill is an important step toward ensuring that people of color have a fair opportunity to achieve the American dream of homeownership. We encourage Congress to pass this bill as written.