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GSEs must change appraisal rules to help end the racial wealth gap

One practice by the GSEs, in particular, works counter to the goals of building generational wealth for minority families. … if a borrower feels that their appraisal is inaccurate or biased and has the luxury of affording a second appraisal mortgage lenders have informed us that it is the policy of the GSEs to accept the lowest appraised value thus institutionalizing the bias and hurting the buyer, the seller and the surrounding community. Can you please stop that?

Good afternoon. I’m Horacio Mendez, President and CEO of the Woodstock Institute in Chicago. We conduct research and advocate for consumer financial protection and community economic development. Our work seeks to combat structural economic inequities and to improve the quality of life in lower income neighborhoods and communities of color. Our approach is collaborative and includes community groups and activists, financial institutions, bank regulators, public officials, researchers and other.

Let’s not fool ourselves, changing the way our housing system works is difficult, and that’s a gross under-statement. We’re trying to jack-hammer through calcified layers of unfortunate policy decisions that have become the foundation of the way things are, and the way things work. This goes back to our founding and our constantly shifting definition of who is a member of society and who our social, economic, and political institutions were originally built to serve. HUD, FHA, Fannie and Freddie are all part of an economic infrastructure that represents affirmative action towards concentrating wealth in white families.

As an economist, I view the actions of these agencies and the industry they oversee as examples of Market Disruption, when a powerful entity (a company, a government agency or a segment of society) intentionally distorts a market for the benefit of a specific few by getting in the way of a competitive market setting the price for a good or a service. Typically, when that powerful entity is found guilty of disrupting the market to their benefit, there’s some form of compensation for the damage done.

In this case, though, we’ve institutionalized the disruption by saying “ok, everybody has to play by the same rules now.” While some call that leveling the playing field, roughly translated in more honest language, it means “nobody can do unto us, what we did unto them.”

The prosperity of our country is stifled when many of our residents lack significant access to capital and are unable to be financially resilient, invest in their futures, and contribute to the local economy and tax base. In economic terms, it is “inefficient” and costs our economy at least $16 trillion.

Let me emphasize that word “resilience.” The key risk in economic inequality is the loss of social resilience, which I define as our ability to cooperate and act collectively for common goals.

By this measure, we’ve been in trouble for quite some time. In the last 4 decades alone, we’re growing poorer and more unhealthy as the top layer of society accumulates more and more wealth.

This inequality has left us vulnerable to shocks that, under better circumstances, we would have been able to withstand — external shocks like COVID, or internal shocks like the murder of George Floyd. When the tide is rising and lifting all boats, you’re less likely to complain about being in a dingy versus a yacht. But that hasn’t been the case, has it?

As a result, we can expect more of the kind of unrest we’ve seen recently. And as unrest over the inequitable distribution of resources, and the inequitable treatment of a large segment of our population grows, more resources go into controlling the population than helping it — which is what we see when police budgets eclipse funding for social services and housing.

So what can FHFA do about this right now? Let’s start with low-hanging fruit. We all know that homeowners of color have long struggled to accrue home equity due to a systemic undervaluing of their homes and neighborhoods. There’s no lack of research showing that current appraisal practices share much of the blame for this.

As a result, a large coalition of public and private organizations in Illinois have convened a Housing Policy Task Force to peel the layers of this onion. Over the course of the last year, we’ve engaged with all of the stakeholders associated with formally regulating the appraisal process and appraisers.

Ironically, although not considered a regulator of that sector, the GSEs have a major impact on the acceptability of appraisal reports generated for mortgage lending and have as much impact on appraisals as the Uniform Standards and state regulations.

One practice by the GSEs, in particular, works counter to the goals of building generational wealth for minority families. As we work to educate consumers about what appraisal discrimination looks like and how to report it, mortgage lenders informed us that we won’t move the needle because of policies at Fannie and Freddie.

Specifically, if a borrower feels that their appraisal is inaccurate or biased and has the luxury of affording a second appraisal, mortgage lenders have informed us that it is the policy of the GSEs to accept the lowest appraised value–thus institutionalizing the bias and hurting the buyer, the seller and the surrounding community. Can you please stop that?

A friend of mine, who is a divorce lawyer, once joked that he was considering a career change to work at HUD, FHFA or one of the GSEs. His reasoning was that, as a divorce lawyer, he can only ruin one family at a time. At one of these agencies, he can wipe out an entire neighborhood. Please prove him wrong.

Thank you.

See the agenda from the Listening Session

Background on the Federal Home Finance Agency’s Equitable Housing Finance Plans for Fannie Mae and Freddie Mac

photo credit: ehpien on flickr