Fannie, Freddie regulator targeting “appraisal bias”

In testimony before a Senate subcommittee September 13, the Chief Economist of the Office of Federal Housing Enterprise Oversight (OFHEO) said the regulator of Fannie Mae and Freddie Mac is “actively researching the issue of appraisal bias.”

“Much of OFHEO’s home value information is derived from appraisals produced in the home refinancing process,” Patrick J.  Lawler told the subcommittee in a hearing on “The Housing Bubble and Its Implications For the Economy.” “Such appraisals, for a variety of reasons, may not always accurately reflect home values.”

We all know what he means: A homeowner trying to cash out equity is interested in as high an “appraised value” as possible, as is his or her mortgage broker or loan officer, who has a commission at stake.  Even non-cash-out refis, ones where the borrower is trying to take advantage of a lower interest rate, may have value pressure if the previous mortgage is young and was for maximum value.

OFHEO’s preliminary research (summarized, if you can call a 67-page PDF a summary, here) has indicated that experimental removal of or discounting for “appraisal bias” leaves its home price research about where it is now, closely tracking both OFHEO’s existing Home Price Index and a theoretical “purchase only” index using only purchase prices and no refi appraisal data.

However, Lawler indicated OFHEO would continue to pursue an effective means of accounting for “appraisal bias” to better describe short-term price change patterns.