FHFA analysis finds racial disparity in appraisers’ use of time adjustments

A Federal Housing Finance Agency (FHFA) analysis has shown racial disparities in appraisers’ use of time adjustments, potentially harming borrowers of minority groups.

The FHFA based its analysis on single-family housing data from the Uniform Appraisal Dataset (UAD), collected by Fannie Mae and Freddie Mac. A 5% sample of the UAD data was used, including the period between the third quarter of 2018 and the fourth quarter of 2021.  

An appraiser can adjust for price changes since a comparable property sale, a process known as time adjustment. It makes more sense when home prices are surging because similar property sales can become outdated quickly. Fannie Mae, Freddie Mac, and FHA appraisal guidelines require such adjustments whenever market conditions change. 

However, time adjustments happened to only 18.5% of all purchased properties in the period analyzed between 2018 and 2021, despite national house prices growing rapidly. 

According to the FHFA, potential reasons for underutilization are that these adjustments are some of the more analytically complex calculations appraisers might perform. In addition, market information about comparable sales data can be sparse, outdated or costly. 

The analysis showed that time adjustments are even scarcer for homes in majority-Black tracts (13.4%) compared to homes in majority-white tracts (18.4%).  

Underappraisals 

According to the analysis, when the appraiser came in at below contract price, called underappraisal, appraisers made time adjustments in 64% of the properties.

But racial disparities remained: time adjustments were used at a 45% rate in homes in majority-Black tracts, 53% in Hispanic tracts and 67% in white tracts. 

Racial disparities remained even after the time adjustment process: it brought 52% of white tract appraisals below the contract price to above the contract price. To illustrate, the rate was 35% in Hispanic tracts and 30% in Black tracts.   

According to the FHFA blog post, home purchases can be complicated by an appraisal below the buyer’s contract price offer. The buyer “typically must renegotiate the purchase price, put more cash down, or accept costlier loan terms.” 

Regarding refinancing, low appraisals can lead to less attractive loan terms, limiting borrowing amounts, or resulting in canceled transactions.

For Black and Hispanic borrowers, “time adjustments could make the difference between an appraisal that allows a home purchase to move forward and one that does not,” the blog post says. 

The Appraisal Institute, the nation’s largest professional association of real estate appraisers, did not respond to a request for comment, nor did the Appraisal Foundation, a private group that is the de facto appraisal regulator.