Our housing market is still bearing the pain and scars from the 2008 housing and financial crisis. The market crash was fueled by a dangerous combination of risky lending practices, speculative investments, and a lack of regulatory oversight. America even today is grappling with that catastrophic market meltdown and our ensuing housing affordability crisis.
While many factors led to the collapse, an essential lesson emerged: the importance of maintaining independence between appraisers and mortgage lenders.
Unfortunately, a new lawsuit brought by the Department of Justice threatens to erode this critical firewall. This legal action is raising concerns that the Biden Administration is weakening the post-2008 housing market protections.
Prior to the crash, appraisers were often failing to assess the value of a home objectively. Under pressure from the mortgage lenders, appraisers frequently inflated the value of homes, which allowed the lenders to approve bigger loans.
We know how that played out.
When homeowners found that their homes’ appreciation slowed and then the value declined, the property owners acted rationally (if not ethically) – they walked away. If the mortgage did not make economic sense, they stopped making payments and ‘gave’ the house back to the risk-assuming bank/lender.
Even worse, millions also lost their homes due to foreclosures. The collateralization of these mortgages created an institutional risk to the global financial system that resulted in long-term consequences that persist to this day.
In the following years, Congress instituted sweeping reforms to reduce the risk of such a scenario from playing out again. This included a law that established a new operational process for the industry, which among other things, mandated that appraisers must act independently from mortgage lenders.
Today, mortgage lenders contract with Appraisal Management Companies, or AMCs, which have the responsibility of contracting with an independent entity to conduct the appraisal. The AMCs work to guarantee that the appraisers in their networks are certified, trained, and qualified. The process ensures that the appraisal and lending are operating at “an arm’s length.” This reduces the conflict of interest that helped create the 2008 housing and financial crisis.
However, the lawsuit brought by the Department of Justice threatens to undermine these checks and balances. Filed in federal court against Rocket Mortgage, Solidifi, an AMC, and Maksym Mykhailyna, an individual appraiser, the lawsuit alleges that the appraiser discriminated against a Black homeowner who was trying to refinance her home.
Admittedly, the work conducted by the appraiser was questionable. He failed to note improvements that had been made, listed the wrong local elementary school, and incorrectly stated that the home did not have a fence. Instead of comparing the home to houses nearby, the appraiser allegedly used comps in neighborhoods further away that had a predominantly black population. This led to an appraisal that was some $200,000 lower than a valuation completed less than a year earlier.
This may, or may not be simple incompetence, but it is not necessarily a conspiracy. And the problem with the lawsuit is found not in the details of the case, but in the big picture ramifications of attempting to hold the mortgage company responsible for the appraisal.
If all of these mistakes in this specific case were not merely the result of sloppy work but were indeed due to appraisal bias – and a widespread concern – the DOJ’s effort to crack down on such misconduct would be justified.
But the problem with the government lawsuit is that the DOJ goes on to accuse Rocket Mortgage of not doing enough to correct the allegedly discriminatory appraisal.
Rocket Mortgage is legally prohibited from intervening in the appraisal process and correctly manages applications through an intermediary. The burden was on Solidifi to review and confirm the appraisal, not the lender. Furthermore, if Rocket sent the appraisal back for a re-do, we could open the door to return to the pre-2008 environment where loan officers pushed for high appraisals and bigger, more profitable loans.
Appraisal bias is a genuine concern and various parties – from the federal government to states and the appraisal industry – have taken steps to address it. But if the government succeeds in penalizing Rocket for a third-party appraiser’s actions, it risks eroding the protections that have helped prevent another housing bubble.
It could also send larger shockwaves throughout the broader housing industry if it now finds itself subject to new legal risks merely for following rules crafted by the federal government.
The government and the appraisal industry should want to work toward ending discrimination issues wherever they are found. But all parties need to do so in a way that maintains the stability of the housing and mortgage-lending industries.
Policymakers should learn from the past. Lender and appraiser independence needs to remain non-negotiable.
Jack Yoest is an Associate Professor of Practice in Leadership & Management at The Catholic University of America in Washington, DC. He served as an Assistant Secretary in the Commonwealth of Virginia.
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