New analysis finds evidence of racial bias in Philadelphia home appraisals

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Federal data shows that racial bias remains a potential roadblock for homebuyers and homeowners in Philadelphia’s predominantly Black neighborhoods, according to new research from the Reinvestment Fund.

The report, released Thursday, focuses on home appraisals. It found that independent valuations completed in those communities were more likely to be lower than the property’s market value, making it harder for buyers to secure mortgage loans, as well as for homeowners to pull equity out of their properties.

“This is not just saying that properties in Black neighborhoods are less valuable than the properties in white neighborhoods,” said Ira Goldstein, senior advisor of policy solutions at the Reinvestment Fund. “It implies that there is some measure of bias in either the individual appraisals, or in some of the appraisal methodology, or a variety of other settings.”

Home appraisals, which are largely carried out by white men, are a crucial component of the mortgage-lending process. Lenders use those valuations to secure loans, whether it’s a first-time buyer or a homeowner looking to refinance to help cover another expense, such as medical bills or college tuition for their children.

Typically, the appraised value of a home is close to, or even matches, the contracted sale price.

If the appraisal for a property is less than the contracted sale price, however, the buyer may be required to purchase private mortgage insurance, potentially raising the amount due each month. The gap could also jeopardize, and potentially kill, the entire purchase agreement. For example, if the seller is firm on the price and decides to wait for a cash buyer instead.

Researchers also found low home appraisals in predominately Black neighborhoods are hindering homeowners looking to take cash out of their mortgage.

Federal data show that applications from these homeowners are more likely to be rejected based on what’s known as collateral, a term that is typically, but not exclusively, tied to the appraised value of the home.

“As a country, I think we are proud of the story, which is that one of the ways people are able to generate some wealth is if they become homeowners and the home appreciates and they pay their mortgage,” Goldstein said. “What we’re saying is on the front end of the report, you have a harder time getting that. And on the back end of the report, we’re saying you have a harder time accessing it.”

Veteran appraiser Carlo Batts, who is Black, doesn’t dispute the report’s findings. But after 20 years in the industry, he’s reached the conclusion that the mortgage lenders are largely to blame, not the appraisers, who he said have been scapegoats on this issue.

Mortgage lenders often contract with appraisal management companies, which in turn contract with individual appraisers operating as solopreneurs. To get paid, those appraisers must adhere to the stipulations and regulations of both companies, which typically include the turnaround time for the appraisal and restrictions on conducting the work.

Batts said these requirements, which are often similar lender to lender, often incentivize speed over quality, opening the door for racial bias. It’s also common for the appraiser to not be familiar with the neighborhood in which they are assigned to provide the valuation.

“They can’t prove his competencies. The only hurdle he’s passed is that he’s licensed,” said Batts, principal of Rittenhouse Appraisals and immediate past president of the Philadelphia chapter of the Appraisal Institute.

For Batts, efforts to diversify the appraisal industry are worthwhile, but he said removing racial bias in mortgage lending will require a systemic approach that dissects the entire mortgage-lending process.

“We’ve got to level the playing field for the real estate industry as a whole. And we need to really take a look at how real estate is involved … in the economics of the country,” Batts said.