Modernization in appraisals urged to eliminate bias
The inspector general’s office of the Federal Housing Finance Agency has released its report on management and performance challenges for the upcoming year, key among them the continued conservatorship of the GSEs – both of which have a combined adjusted total risk-based capital shortfall of more than $400 billion, according to the document.
“Strong supervision is especially important for the enterprises because they have a combined adjusted total risk-based capital shortfall of $421 billion,” officials wrote in the report released Friday. “FHFA must supervise them to ensure that they work to meet regulatory capital requirements.”
FHFA is vested with express authority under the Housing and Economic Recovery Act of 2008 to operate the GSEs, officials wrote, which includes exercising broad authority over trillions of dollars in assets and billions more in annual revenue. “In this role,” officials added, “FHFA makes business and policy decisions that can influence the entire mortgage finance industry.”
Fifteen years under conservatorship and counting
Exacerbating the challenges is the unknown time period for which the GSEs will remain under conservatorship, according to the report: “Given the taxpayers’ sizeable investment in the enterprises, the conservatorships’ unknown duration, the enterprises’ critical role in the secondary mortgage market, and the necessity to sustain their own future profitability, OIG determined that FHFA’s administration of the conservatorships remains a critical challenge.”
Fannie Mae and Freddie Mac both were put under conservatorship on Sept. 6, 2008, while in the throes of the Great Recession. The government-sponsored entities were placed under conservatorship to preserve and conserve their assets and property toward restoring them to a sound and solvent condition, according to the FHFA. As conservators, the FHFA has the powers of the management, boards and shareholders of Fannie Mae and Freddie Mac.
Appraisal bias persists, modernization urged
A key challenge centers on modernization: “To further this conservatorship goal, FHFA has directed the enterprises to continue work related to the appraisal policy and process modernization initiative,” officials wrote. “That work includes engaging with industry stakeholders, such as appraisers, software providers, insurance companies, appraisal management companies, inspection companies, mortgage insurers, and industry trade groups.”
In securing such input, the FHFA will be able to meet goals related to improving data quality, reducing potential appraisal bias and supporting effective risk management and process efficiency, officials wrote in the report. And, yet, the report found, accounting for the various viewpoints and information can also present challenges.
In terms of appraisals, the report calls for bolstered oversight of the GSEs’ use of appraisals “…to ensure those appraisals do not improperly consider bases that are prohibited by federal fair lending law.”
The suggestion for added oversight was prompted by sampling showing persistent bias in appraisals, according to the report: “FHFA’s independent review of a sample of appraisal reports concluded that valuation bias persists in housing finance in America,” officials wrote in the report. “In its review, the agency identified several overt references to race, color, and other prohibited bases in appraisals. During our evaluation, FHFA told us they made 17 referrals to the US Department of Housing and Urban Development and made appraisal information available to the US Department of Justice.”
Use of lending strategies such as interest rate buydowns encouraged
Given the volatility of the market, the report suggested the offering of interest rate buydowns and other such tactics to aid borrowers. The report referenced today’s high interest rates, limited home supply, elevated home prices and continuing inflation as among the challenges besetting the housing market. “Temporary interest rate buydowns and other lender strategies to assist borrowers with purchasing homes in this high interest rate environment require the regulated entities to monitor those loans’ characteristics to accurately assess risk,” the report reads.
Mortgage Professional America reached out to Wendy Wagner-Smith, a spokesperson for the Federal Housing Finance Agency, Office of Inspector General, for insight on the report. She said the document was released in the interest of transparency in the workings of the Office of Inspector General.
“The management challenges document is actually a mandated report and the OIGs have to do that every year,” she told MPA during a telephone interview. “The purpose of it is basically transparency and reporting whatever agency that OIG is responsible for overseeing. It’s supposed to be a way to help the agency as it tries to deal with management issues that are usually unique to that agency.”
The report also had to be released on a specified timeline, she added. “As you know, the federal fiscal year just ended,” she said. “We have so many days after the end of the fiscal year to put out our annual management challenges, and that document always goes to the head of the agency first and then it’s released publicly.”
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