Between the Lines of Real Estate Appraisals

Know Your Rights in Housing Transactions

By Jill Terry

Can a real estate appraisal play a role in potential discrimination? You bet it can.

HUD (Office of Housing and Urban Development) created the Fair Housing Act (FHA) specifically to prohibit discrimination¹ in housing transactions. The FHA (along with the Equal Credit Opportunity Act) makes discrimination illegal in mortgage transactions. Most of us don't consider an appraisal as part of the credit process, but if a bank wishes to prevent an applicant from moving into a certain neighborhood, it may enlist the help of a willing appraiser to create a valuation that is too low to justify the loan amount.

Appraisals can read like another language to a layperson--how can you spot discrimination if it's subtly concealed? To begin, appraisals shouldn't read like a foreign language. The Equal Credit Opportunity Act entitles you (the borrower) to a copy of the appraisal precisely so you can review it for information that is unclear or questionable. Some aspects of the appraisal may seem more technical or complicated than others, but most of it should be straightforward enough to make sense to you. If it isn't, ask questions of the lender or the appraiser. If they can't answer your questions to your satisfaction, you may have your first clue that something is amiss.

An appraisal is supposed to be an objective inspection and valuation of the property that will be the subject of the loan transaction. The contents of an appraisal should contain supportable, factual information--subjective comments and rating systems are unacceptable. The Appraisal Standards Board, which governs the practices of the appraisal industry, created the Uniform Standards of Professional Appraisal Practice (USPAP) for appraisers to follow, and these standards are in strict compliance with fair housing laws.

Here are some examples of subjective items that have appeared in appraisal reports. They are typical of the sorts of comments that may be euphemisms for discriminatory observations.

"High crime area." What constitutes a high level of crime? And what kind of crime? This phrase is sometimes "code" for properties in low income or minority neighborhoods. Because there is no factual reference included in such a comment, it becomes a subjective judgment rather than an objective observation.
"Pride of ownership." Does this phrase describe the property or those who live in it? Clearly, such a label is intended to give the reader of the appraisal an idea of who is living on the property now, information that is completely irrelevant. Beware, too, of any remarks that cast aspersions on the current inhabitants. Here are some examples:
- "Many cars in disrepair in the yard/driveway." (It doesn't matter how many cars the inhabitants have or how dilapidated they are--what matters is whether there is a driveway.)
- "Trash in the front yard." (Trash can be picked up--it has no bearing on the functionality or useful life of the home.)
- "Dining room being used as a bedroom to accommodate 15 people." (Who cares how the rooms are being used? Unless there's physical damage being done by the overuse of one room or section of the house, the number of people currently living in a home has no place on an appraisal report.)
- "Graffiti." (This can be another code word for an area about which the appraiser or lender has personal feelings. Graffiti is cosmetic and can be removed--it does not affect the property's functionality.)
Inclusion of people in pictures of property. Appraisers are required to take photos of the property they evaluate, but those photos should include neither the home's nor the neighborhood's residents. Obviously, such photographs present an opportunity for an appraiser or lender to show potential buyers the ethnicity or familial status of those currently on the property.

Other Issues to Look For
Most consumer mortgage appraisals utilize "comps" to help establish value. "Comps" is the industry shorthand for comparables or other properties in the neighborhood whose features are similar to the subject property. Watch for comps that are:

Limited in number. (Comparing a property with only one other is generally not a legitimate way to establish value--unless sales in the area have been exceptionally slow and there are no recent sales.)
Not comparable. (Appraisers sometimes get lazy and call any old property comparable. You should verify that these comps are genuinely similar to the subject property--i.e., the same number of baths, bedrooms, and floors; improvements; economic age--or have the appraiser justify his or her choice.)
Not in the same neighborhood as the subject property.

Your appraisal should contain only information that is verifiable, factual, and objective. If it uses undefined rating systems or draws conclusions about the residents and neighbors, FHA has probably been violated and HUD will want to know about it (as will the bank's federal regulator). You can complete a complaint form online with HUD or contact the HUD office nearest you to file a complaint.

¹FHA prohibits discrimination on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18), and handicap.