Rankings Undervalue Refis for Black Debtors: Fannie Mae

Black borrowers seeking home loan refinance receive slightly undervalued ratings, while those for white consumers tend to be overvalued, according to a new working paper from Fannie Mae.

Fannie reported that some gaps compared to automated scoring models were -1% for black consumers and 2% for white consumers. The state-sponsored company, which is a major buyer of loans in the United States, also found that these disparities were more pronounced in areas where the race of the majority population differed from that of the borrower.

The results are consistent with an earlier assessment by Fannie's competitor Freddie Mac, who found guiding similar patterns when comparing purchase contract prices to estimates. Both analyzes support initiatives being endorsed by the Biden administration at the GSEs and other housing agencies to fill a persistently large racial homeownership gap.

Fannie's paper, which shows gaps between two proprietary AVMs and ratings, may not reflect racial discrimination but does suggest the potential for it, according to authors Jake Williamson, Fannie's vice president of risk management for single-family home collateral, and Mark Palim, assistant chief economist and Vice President.

“There are many possible reasons why a review would be either over- or under-rated. Fannie Mae and its industry partners should continue to take specific steps to minimize the likelihood that a borrower's or homeowner's race is one of these reasons," Williamson and Palim said in the report.

While the median differences reported in the publication reflect relatively small percentages, testing by the researchers found them to be statistically significant. For their conclusions, they analyzed 1.8 million reviews from 2019 and 2020.

Black resident homes in majority white areas were valued at $1,693, or 58 basis points lower than a proprietary AVM, Palim and Williamson. The ratings made for these borrowers were also down $1,143, or 39 basis points, when compared to another rating model.

For white borrowers in majority black areas, the estimates were $3,955, or 1.84% higher compared to the one AVM. Settlements to a second AVM for these borrowers were $1,525, or 63 basis points higher.

In cases where the majority of the population and the borrower were white, estimates for the first AVM were $1,277, or 42 basis points higher. The comparable numbers for the second AVM were $2,026, or 65 basis points.

For areas where the majority of the population and borrowers were Black, estimates were $572, or 25 basis points, lower in the first case. In the second, they were down $1,437, or 63 basis points.

Rating organizations took note of the report and said they were redoubling efforts such as anti-bias training and diversity initiatives in response.

"As we analyze the findings of Fannie Mae's report, we can say with absolute certainty that bias has no place in the appraisal," Appraisal Institute President Jody Bishop said in an email take and will continue to do so in the future.”

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