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In December 2020, FHFA issued a Request for Information (RFI) on
Appraisal Related Policies, Practices, and Processes to gather input on how the Enterprises can improve the appraisal process. The RFI requested information on:
Since the RFI, FHFA's Office of Fair Lending Oversight has engaged in information exchange with industry professionals and other federal stakeholders on valuation bias issues, needs, and best practices. By reviewing data, appraisals, and other property valuations, FHFA can better undestand valuation bias.
FHFA is a participant in the interagency
Property Appraisal Valuation and Equity (PAVE) taskforce. In our review of appraisals, we have observed references to race and ethnicity in the "Neighborhood Description" and other free-form text fields in the appraisal form. FHFA is sharing examples of these observations for public transparency and to assist others with fair lending compliance. Institutions and other market participants should be aware that the discretionary nature of the free-form commentary is a key risk factor that requires appropriate risk mitigation.
The Enterprises are also assessing and identifying valuation bias, to inform the public on this important issue:
Appraisals and Inequality
As we consider how to best address bias in appraisals and other valuations, we must first acknowledge and understand the inequalities that exist now between Black and white households (Figure 1). White households are overwhelmingly wealthier than Black households. Homes in Black neighborhoods tend to be
valued less when compared to similar homes in white neighborhoods. Lastly, the 78,000 member appraisal workforce is
overwhelmingly white and male.
FIGURE 1: Appraisals and Inequality
FHFA's main goal in addressing valuation bias is ensuring compliance with
federal fair lending law, the Fair Housing Act, the Equal Credit Opportunity Act, and the Safety and Soundness Act. One way to assess fair lending compliance is to review free-form text fields. The appraiser uses discretion when describing a neighborhood. Generally, the use of discretion can present fair lending risk because it allows overt or indirect references to race, ethnicity, or other prohibited bases to enter the process and can be applied unequally to favor or disfavor neighborhoods based on race or other prohibited bases.
The Uniform Standards of Appraisal Practice (USPAP) states that "[a]n appraiser must not perform an assignment with bias" and "[a]n appraiser must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value."
Uniform Appraisal Report (URAR) provides in the neighborhood section of the form that "Race and the racial composition of the neighborhood are not appraisal factors." An appraiser certifies upon completing the URAR that "I did not base, either partially or completely, my analysis and/or opinion of market value in this appraisal report on the race, color, religion, sex, age, marital status, handicap, familial status, or national origin of either the prospective owners or occupants of the subject property or of the present owners or occupants of the properties in the vicinity of the subject property or on any other basis prohibited by law."
However, references to race and ethnicity persist in the commentary sections of present-day appraisals. FHFA has decided to release this limited information concerning our review to inform the public and support improvements in industry practice.
What We Observed
From millions of appraisals submitted annually, a keyword search resulted in thousands of potential race-related flags. Individual review finds many instances of keywords to be false positives, but the following are examples of references when the appraiser has clearly included race or other protected class references in the appraisal.
The racial and ethnic composition of the neighborhood should never be a factor that influences the value of a family's home. Our observation of appraisals suggests that racial and ethnic compositions of a neighborhood are still sometimes included in commentary, clearly indicating the writer thought it was important to establishing value.
Examples of racial and ethnic references we found in appraisals include:
There is likely not a single solution to neutralizing discrimination and discriminatory practices in property valuation. FHFA and other agencies are exploring many ways to combat appraisal bias, including increased transparency and awareness and more training and education. Market participants could benefit from guidance and best practices to improve commentary and provide more objective free-form text narratives. By updating industry norms on the type of neighborhood information that is appropriate to include and moving neighborhood descriptions away from the examples we shared above, we can begin to establish more equitable assessments that ensure fair and unbiased property valuation for all.
fair lending; fair housing; Appraisals
Senior Examination Specialist Office of Fair Lending Oversight Division of Housing Mission and Goals
Associate Director Office of Fair Lending Oversight Division of Housing Mission and Goals
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