Six federal agencies—including the Consumer Financial Protection Bureau (CFPB), the Federal Housing Finance Agency (FHFA) and the Federal Deposit Insurance Corporation (FDIC)—recently announced a new standard of quality controls for automated valuation models, or AVMs, as used by mortgage originators and secondary market issuers. AVMs are algorithms that can estimate a property’s value using large amounts of data.
This new rule has five primary goals, according to the CFPB:
- Ensuring a high level of confidence in estimates by AVMs.
- Protect against manipulation of sampled data.
- Conflict of interest avoidance.
- Mandated random sample testing.
- Nondiscrimination law compliance.
The rule was first announced by Vice President (and presumptive Democratic Presidential nominee) Kamala Harris on June 1, 2023. The CFPB described the final rule that agencies will be following as “substantively similar” to Harris’ initial proposal.
Harris has previously stressed the fifth prong of the rule’s reasoning: an assurance that the algorithms of AVMs are racially unbiased. That way, especially as mortgage originators rely on AVMs and their findings more, their usage does not contribute further to the racial homeownership gap.
“Black homeowners are more likely to have their homes undervalued than other homeowners. And homeowners in majority Black and majority Latino neighborhoods are almost twice as likely to be undervalued,” said Harris in a 2023 statement. “And because their homes are undervalued, Black and Latino people often pay more for their mortgage, receive less when they sell, and are less able to get access to home equity lines of credit—all of which widens the racial wealth gap and deepens longstanding financial inequities.
One way this gap perpetuates itself is that Black-owned homes are appraised to be of lesser value than white-owned homes. This economic disparity reinforces a racial one, as has historically been the case in, for instance, St. Louis, Missouri, and its “Delmar Divide” between white and Black homeowners.
Harris’ previous work on housing is certain to be closely scrutinized as she seeks to win the presidency in November, following current President Joe Biden’s choice to leave the race.
Freddie Mac, which in 2021 conducted a study on this “valuation gap” and found “severe bias,” has suggested that AVMs can be a tool to reduce this gap (algorithms theoretically lack human bias). HouseCanary, a valuation-focused real estate brokerage, has echoed these calls. Since algorithms draw on (human produced) data to make their conclusions, therein lies the need for quality control and human oversight in AVMs.
Real estate and mortgage industry officials generally concur with agencies that AVM guidelines are a needed step. A Bright MLS spokesperson tells RISMedia that they agree with a need for regulation, “transparency” and a “human element” when it comes to AVMs, but feels the agencies’ rule neglected the specific guidelines they offered in letters to federal regulators.
“Our comments in the proceeding recommended that the agencies’ proposal on ROVs adopt explicit, clear guidance regarding the use of automated property valuations. This includes our recommendations that completely automated models not be considered for reconsiderations of value (ROVs), that models must be transparent about the methodologies used and that models must allow consumers to incorporate a real estate professional’s input. While we are disappointed that our comments were not addressed, we look forward to continuing to work with the agencies and others who are evaluating these issues so that consumers are provided with more transparent opportunities to correct deficiencies and inaccuracies in their real estate valuation. We believe this is fundamental to an equitable housing market.”
ROVs are when an appraiser is asked to reconsider their initial assessment of a property value. In September 2023, Bright MLS President and CEO Brian Donnellan sent a letter to the Federal eRulemaking Portal, outlining how consumer-focused AVMs (e.g., Zillow’s Zestimate tool) can be “problematic” in this process; the property assessment is quickly generated, but the data and methodology is kept obscured from the user, potentially leading to inaccuracies.
Ken Wingert—Zillow’s director of Government Relations—previously sent a letter to regulators in 2023 that the Zestimate “is not authorized for use as an AVM for credit decisions.” As the Zestimate is a consumer-facing tool, rather than one used by mortgage originators, it and similar tools do not fall under the purview of the agencies’ new rule.
“Zillow believes uniform AVM standards are an important step toward increasing consumer and market confidence in the accuracy and fairness of automated valuations,” says a Zillow spokesperson. “Quality control standards should be principles-based in the regulation of AVM models to help foster innovation that will ultimately benefit consumers and the housing market. To that end, Zillow has worked with MISMO through our affiliated lender, Zillow Home Loans, to stand up an industry working group dedicated to creating best practices and standardization of AVMs. Our commitment to responsible AI is reflected in our principles, which drive us to prioritize fairness in our AI systems and provide customers with transparency on how AI tools enhance their experience.”
MISMO (Mortgage Industry Standards Maintenance Organization), a subsidiary of the Mortgage Bankers Association, sets mortgage industry data standards required by most regulators.
RISMedia spoke with other industry institutions that stand to be affected by these new rules. Their comments generally echoed that AVM quality control is needed.
Ken Fears, the National Association of REALTORS®’ director of conventional housing finance and valuation policy, tells RISMedia: “The dramatic growth of Automated Valuation Models (AVMs) in the mortgage finance sector over the past two decades highlights the importance of robust rules and oversight of this industry. We commend the regulators for finalizing this rule, which marks a significant step towards enhancing standards for the development and deployment of AVMs. This rule has the potential to help foster better standards for building and implementing AVMs, as well as checks against fair housing violations. REALTORS® support CFPB’s rule, which has a sweeping application across stakeholders in the mortgage industry, ensuring a level playing field. However, REALTORS® stress that using a state-licensed or certified appraiser for the entire valuation process remains the best practice.”
“Creating a suite of MISMO AVM standards will support the industry in communicating risk effectively, therefore improving the quality of risk-based decisions, encouraging AVM adoption among lenders and assisting with compliance of the recently published Interagency Rule on Quality Control Standards for Automated Valuation Models,” says David Coleman, president of MISMO, in a press release.
