Government Mortgage Reform and Your FHA Loan
November 10, 2022
Recent reports indicate the federal government is now looking at ways to reduce bias in the home buying process. One way this is happening is examining various stages of the home loan process to eliminate potential discrimination, and a key part of that process is the appraisal.
The appraisal is a process--looking at the house to make sure it meets the minimum requirements and has a remaining economic life that can last the entire term of the loan--but that is NOT the aspect of appraisals we are talking about. We’ve covered that extensively here.
At issue for home loan reform? The part of the process where the house in its current condition is measured against similar homes in the area--the ”comparables.” This can affect not just how much the home is worth but whether the home can qualify for an FHA mortgage in the first place.
Mortgage Reform and the Use of Comparables
The home you want is reviewed on its own merits but also how it measures up to the comparables in that housing market.
And comparables are one area some industry pros say are rife with the potential to be racially biased. An agency called The Appraisal Institute added a five-hour training seminar focused on addressing unconscious bias, updated its code of ethics, and created a practice guide affirming that appraisers “should ignore ethnographic and other personal characteristics” that may be visible when comparing properties, according to a National Association of Realtors article.
One major industry player, Black Knight, started reviewing its appraisal process to identify such bias and has upgraded their automated appraisal system to incorporate fixes to the bias problem.
Some might be wary of this, accusing Black Knight of giving in to some kind of political agenda, but multiple mortgage news sources have reported in 2022 that federal agencies including Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency have all identified racial bias issues against protected classes during the purchase and refinance process.
One federal step toward creating more transparency in the process? Fannie Mae and Freddie Mac will now make its appraisal data open to the public. The data is drawn from over 47 million appraisals between 2013 and 2022.
Bias: a Key Driver?
There is support for mortgage reform across the aisle. This is not an election year stunt by one political party or another for the purpose of scoring mid-term election wins. Freddie Mac and Fannie Mae studies on this issue reveal appraisal bias against Black and Latino house hunters.
That said, some politicians have complaints that racial bias was not solely to blame in these reports, but was rather a “key driver.” Those in the housing industry interested in ending appraisal bias seem to trend towards getting rid of ANY such bias, key driver or otherwise.
What it Means to You
Ending bias in the lending process is an important task, but appraisal reform also means the potential for other changes in government-backed loans and conventional loans alike. Could changing the rules for appraisals make it easier to buy a non-traditional type property like a tiny house, barndominium, or solar-powered home?
Many home loan programs don’t allow for these types of properties because of the comparables issue. If appraisal reform includes changing the definition of comparables (which is not guaranteed to happen), it could potentially open a borrower’s range of options further into properties once deemed too unique to get a realistic appraisal for.
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Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
The appraisal is a process--looking at the house to make sure it meets the minimum requirements and has a remaining economic life that can last the entire term of the loan--but that is NOT the aspect of appraisals we are talking about. We’ve covered that extensively here.
At issue for home loan reform? The part of the process where the house in its current condition is measured against similar homes in the area--the ”comparables.” This can affect not just how much the home is worth but whether the home can qualify for an FHA mortgage in the first place.
Mortgage Reform and the Use of Comparables
The home you want is reviewed on its own merits but also how it measures up to the comparables in that housing market.
And comparables are one area some industry pros say are rife with the potential to be racially biased. An agency called The Appraisal Institute added a five-hour training seminar focused on addressing unconscious bias, updated its code of ethics, and created a practice guide affirming that appraisers “should ignore ethnographic and other personal characteristics” that may be visible when comparing properties, according to a National Association of Realtors article.
One major industry player, Black Knight, started reviewing its appraisal process to identify such bias and has upgraded their automated appraisal system to incorporate fixes to the bias problem.
Some might be wary of this, accusing Black Knight of giving in to some kind of political agenda, but multiple mortgage news sources have reported in 2022 that federal agencies including Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency have all identified racial bias issues against protected classes during the purchase and refinance process.
One federal step toward creating more transparency in the process? Fannie Mae and Freddie Mac will now make its appraisal data open to the public. The data is drawn from over 47 million appraisals between 2013 and 2022.
Bias: a Key Driver?
There is support for mortgage reform across the aisle. This is not an election year stunt by one political party or another for the purpose of scoring mid-term election wins. Freddie Mac and Fannie Mae studies on this issue reveal appraisal bias against Black and Latino house hunters.
That said, some politicians have complaints that racial bias was not solely to blame in these reports, but was rather a “key driver.” Those in the housing industry interested in ending appraisal bias seem to trend towards getting rid of ANY such bias, key driver or otherwise.
What it Means to You
Ending bias in the lending process is an important task, but appraisal reform also means the potential for other changes in government-backed loans and conventional loans alike. Could changing the rules for appraisals make it easier to buy a non-traditional type property like a tiny house, barndominium, or solar-powered home?
Many home loan programs don’t allow for these types of properties because of the comparables issue. If appraisal reform includes changing the definition of comparables (which is not guaranteed to happen), it could potentially open a borrower’s range of options further into properties once deemed too unique to get a realistic appraisal for.
------------------------------
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
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