Restorative Appraisals for Equitable Community Development

Starting Date: 2017-01-01

Fannie Mae guidelines place Black communities at a disadvantage in the appraisal process due to historic and intentional denial of resources in these neighborhoods. The “restorative appraisal” would compare housing stock rather than neighborhoods. Current appraisal guidelines reinforce low values in already declining neighborhoods by restricting comps to the same or other Black neighborhoods, rather than similar houses in comparable white neighborhoods. Continuing to use the comparable sales in a declining neighborhood only perpetuates low values.

The Restorative Competitive Value (RCV) technique would compare housing stock, rather than neighborhoods. It would allow appraisers to expand their consideration of sales beyond traditional marketplace/district/neighborhood boundaries and consider nearby sales that transpired in the past but exceed common guidelines favoring only recent sales. In St. Louis, communities north of the Delmar/Olive Divide are historically undervalued due to racial discrimination. By considering transactions from alternative (white) communities that feature similar housing stock, the geographic pricing gaps would reveal a potential “restorative” gain in value for disadvantaged communities.

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What is the geographic reach of your work to date?

Regional

Which metropolitan areas (if any) does your work focus on?

St. Louis , MO (other weak market Legacy cities)

What is the core idea of your innovation? How does it increase the value of homes in Black communities?

Our core idea is to substantially alter the appraisal process by redesigning the sell rule appraisal guidelines set forth by FHFA and the GSEs (FNMA, Freddie Mac, FHA, and HUD). Fannie Mae guidelines place black communities at a disadvantage in the appraisal process due to historic and intentional denial of resources in these neighborhoods. The “restorative appraisal” would compare housing stock, rather than neighborhoods. Current appraisals guidelines reinforce low values in already declining neighborhoods by restricting comps to the same or other black neighborhoods, rather than similar houses in comparable white neighborhoods.

The legacy of racial segregation should not be used as a cudgel against the value of a property in black communities that adversely influences location selections by buyers. Continuing to use the comparable sales in a declining neighborhood only perpetuates low values. If the selling guide comparable selection rules remain unaltered, black communities will continue to experience decline in wealth accumulation. Any attempt to restore value in a black neighborhood will be perpetually undermined.

There is an alternative. The Restorative Competitive Value (RCV) technique would compare housing stock, rather than neighborhoods. It would allow appraisers to expand their consideration of sales beyond traditional marketplace/district/neighborhood boundaries and consider nearby sales that transpired recently and in the past but exceed common guidelines favoring only recent and nearby sales from “similar” areas, which only recycles the discriminatory effect. In St. Louis, communities north of the Delmar/Olive Divide are undervalued due to historic and current racial discrimination. By considering transactions from alternative (white) communities that feature similar housing stock, the geographic pricing gaps would reveal a potential “restorative” gain in value for disadvantaged communities.

How is your idea new or different from current approaches?

In St. Louis and other devalued cities like Detroit, community development is approached from a programmatic market-based perspective that assumes change comes from individuals’ adapting to discrimination in the real estate market, reinforcing buyer’s existing patterns of self-selection. That approach maintains the status quo and rarely address systemic policies and practices, therefore they fail.

The newly released (Jan 2022)“Appraisal Standards and Appraiser Criteria” report by the NFHA Consortium “highlights the deep inequities and systemic issues of bias in the appraisal industry that restricts homeownership and important lending opportunities for people of color”, its analysis and recommendations are predictably focused narrowly on discriminatory treatment and bias, and not the institutional racism and policy-based solutions we present here.

Our innovation challenges long held racist real estate assumptions about financial risk and race. To recover from the deficit that systemic racism created, any redevelopment effort of a black community, especially in a weak market, should have a holistic place-conscious strategy. The “restorative” concept is very applicable to specific black neighborhoods where there is a strategic plan to invest money in areas of economic stress.

Devaluation of black neighborhoods in cities like St. Louis, Detroit and other legacy cities has over decades precipitated decline by undermining confidence in the future of the neighborhood. It will take more than closing the appraisal gap to change that perception. Therefore, to realize lasting wealth increases, a “home equity assurance” program is needed to provide insurance against property value decline during a recovery period. It would mitigate risks and help to stimulate the demand for housing. Participating home buyers and existing homeowners in the target neighborhood would opt into the program and pay a fee and/or insurance premium. Claims are paid if, upon resale, the sale price is less than the original appraised value. It would guarantee new homebuyers and existing homeowners that invest in their homes against loss of value if they remain in a neighborhood for a specified period. Our proposed use of home equity assurance is not to manage integration by stopping white flight, but to sustain a regenerating black community, by providing confidence in its future.

What are the primary circumstances that devalue homes in Black communities that you are addressing? What is the impact?

The “Delmar Divide” is the line of demarcation that segregates white and black neighborhoods in the city of St Louis. In St. Louis County, Olive Boulevard serves the same purpose. Even after the passage of the 1968 Fair Housing Act, restrictions on where black people can live continue. Historically, development policy in St Louis located resources and amenities primarily in white neighborhoods south of the Delmar/Olive Divide to the detriment of black communities. Unfortunately, underwriting guidelines have codified the devastating results of underinvestment to justify further devaluing black communities.

Within the St Louis region, strong housing markets predominate in white neighborhoods, never in black neighborhoods. Because of potential displacement of lower income residents in strong housing markets, national housing policy attempts to preserve the availability of affordable housing by constructing more housing in those neighborhoods. Unfortunately, when national policy is applied to weak markets like St. Louis, additional construction of affordable housing only increases areas of concentrated poverty and accelerates imbalance of incomes within black communities, which weakens the housing market.

In the St. Louis region, the approach to improving black neighborhoods has followed national policy for strong markets rather than weak markets. This misinterpretation translates into additional new low-income housing in already high poverty areas. The inappropriate use of national housing policy in weak market situations is self-defeating and reinforces the racially biased real estate mindset and appraisal system that perpetuates devaluation of black neighborhoods.

The St. Louis region needs a change of mind-set regarding undervalued black communities. It would also help if national housing policy was more flexible in its approach to weak markets. A more geographically targeted and holistic approach toward creating socially and economically inclusive communities is essential in valuing homes in black communities, especially in hyper-segregated cities. But to get started, appraisers must be unafraid to use an alternative evaluation approach to increase and sustain values of black communities. With sufficient time, pilot programs using the Restorative Appraisal modification and an assurance mechanism should integrated into the larger community.

What were your “aha” moments (the key insights) that led you to see how your innovation could work?

Several “aha” moments made our team aware that home appraisals as currently governed by secondary market agents are responsible for decline in black wealth accumulation. As an example, the predominately black West End neighborhood in St. Louis is immediately north of the Delmar Divide. A black homeowner accepted an offer on her recently renovated home from a black buyer. When the appraiser submitted the appraisal, the value was $10,000 lower than the sale price. The buyer’s real estate agent questioned the low value and discovered that the appraiser used comps from another black neighborhood, also north of Delmar, where the housing types were not comparable, while a more recent sale of an almost identical home, south of Delmar and in an immediately adjacent neighborhood, was not considered as a comp. When this was brought to the attention of bank officers, they adamantly refused to consider anything south of the Delmar Divide.

We discovered that Fannie Mae appraisal guidelines explains their unwillingness. “An appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised, based on the actions of typical buyers.” B4-1.3-03. Interpretation: same influences = another black undervalued neighborhood; and typical buyers = other black homebuyers.

The second insight came to Doug Potts, a career appraiser/educator and real estate agent and member of our team who has been working on equitable appraisal solutions for several years. He was struck by a finding in Freddie Max’s recent study that appraisers “are using comparable sales from more distant neighborhoods than they are in black neighborhoods.” Data from this analysis reinforced his proposed solution to appraisal bias: expand the distance from black neighborhoods to find comparable housing types for comparable sales. Doing this breaks the echo effect of prior low sales.

Finally, when WITH ACTION met Doug Potts, we realized that his alternative appraisal technique would help increase valuations in black communities and could be sustained by a home equity assurance type program. We were familiar with the original assurance program in Oak Park, IL and one in Ferguson, MO. When paired with restorative appraisals in a black community undergoing renewal, sustainable recovery of wealth in a black community is possible.

How does your innovation create structural change? What will be different in 5-10 years if you are successful?

From the 1930’s, redlining has had a devastating impact on black communities. Across the country, its impact has extended beyond its original boundaries as black families moved to better circumstances.

In St. Louis, the Delmar Divide has been impenetrable because of the redlining policies sustained by Fannie Mae and other GSE guidelines. Appraisers can be fined or lose their license for not following these guidelines. Until the policy has been changed by Fannie Mae, banks will insist that appraisers follow the Fannie Mae guidelines.

Our innovation, which effectively eliminates Fannie Mae’s “redlining” policy, should be extended to other weak market cities like Detroit and nationally. If we are successful, our innovation will change how homes are valued in all black communities. It would give black neighborhood values a boost and stability. It will allow neighborhoods to transform from declining to healthy communities. Eventually, it should lead to economically integrating neighborhoods and schools, thereby increasing economic mobility.

Our vision is to promote socioeconomic and racial inclusive communities throughout the region and nationally. The Restorative Appraisal innovation with the support of the home equity assurance concept should convert weak housing markets in black communities to stronger more competitive markets in the region. Ultimately, it will be up to major policymakers to desegregate the St Louis region by enforcing the “affirmatively further fair housing” section of the 1968 Fair Housing Act. Eventually, there will not be a distinction between home values in black and white communities.

What is your innovation’s path to (i.e. strategy for) success? What momentum or impact have you achieved thus far?

Doug Potts, our teammate, began working on the innovation about four years ago before the Freddie Mac study was completed. Data from the Freddie Mac report reinforced his ideas for reforming appraisal practice that could be a practical and easily applied solution. He made an informal presentation at a Fannie Mae meeting in 2021 and received encouragement in discussions his with colleagues at the state and national levels. He shared his idea with Rosalind and Barbara, who were pursuing more holistic community development approaches to neighborhood renewal. They understood that equitable appraisals are the linchpin to black neighborhood recovery, but in cities like St. Louis that have been severely damaged, home value recovery will require many other supports.

To gain acceptance and credibility both locally and nationally, a proof-of-concept is needed. The city of St. Louis has shown willingness to explore the innovation in specifically identified black neighborhoods. We will need to define a variety of special loan programs to entice investment, while the home equity assurance program will provide investor confidence.

To convince the appraisal community to change we need other reforms:
• Present all the potential sales and require the appraiser to justify the rationale of what was chosen vs what was eliminated from further analysis. This would provide for a more accountable analysis and also protect appraisers from unwarranted accusations of bias.
• RCV needs to be combined with traditional valuation opinions. The appraiser will essentially issue 2 opinions: opinion of value based on standard FNMA/HUD rules (likely low), and opinion of RCV that uses the expanded criteria and will result in the Restorative estimate to allow financing to proceed for a specific property in a Designated District. This “dual assignment condition” structure allows appraisers to manage the process without fearing legal/liability blowback.
• Revise the Selling-Guide to fix underwriting standards to recognize “Designated Districts”.
• Clarify the Appraisal Management Company (AMC) Rule to enforce revised guidance.
• Reform the Reconsideration of Value (ROV) to allowing a borrower to formally protest a lower-than-expected appraised value.

We believe that the model will expand to other parts of the region and other cities as the demonstration shows positive results.

What will take your innovation to the next level?

Initially, we need recognition that the innovation has merit in valuing homes in black communities. Becoming a finalist in the Challenge would provide great creditability. Next, educating all stakeholders that have a role in valuing homes in black communities is essential. We will then need partners to design the Restorative Appraisal policy and design a home equity assurance program that instills investment confidence.

The first step in establishing the proof of concept is a commitment from the City of St. Louis (or another city) to cooperate in establishing a pilot neighborhood demonstration and providing funding for housing programs and neighborhood improvements.

The pilot would require:
• Several banks to agree to make portfolio loans and use the restorative appraisal innovation in a targeted district to demonstrate the concept.
• Convincing appraisers and banks to use the Restorative Appraisal process.
• Establishing the home equity assurance Fund for the demonstration project.
• A governmental or non-profit administrator of the home equity assurance program and a monitor and evaluator of the demonstration.
• An array of housing rehabilitation programs and participants.
• Targeted community engagement and buy-in.

How will you involve others to move your initiative forward?

Ultimately, we need major policy changes at the national level to integrate into accepted appraisal practice and to widen its impact. But first, we need to demonstrate how a restorative appraisal approach can change the direction of historically devalued black communities, especially in weak regional housing markets where biased appraisals have produced the greatest wealth gaps.

We have already begun discussions with several banks that are interested in investing in black neighborhoods but have been frustrated by low appraisals. Avoidance of Fannie Mae and HUD rules is important to have appraisers willing to participate.

St. Louis Development Corp. is interested in using the equity assurance program and the restorative appraisal technique in a targeted neighborhood of the city that is undergoing renewal. This demonstration of “restorative” appraisals combined with home equity assurance and an aggressive housing rehabilitation strategy could become a model for other areas of the city and country. We also need a neighborhood organization in the city of St. Louis, north of the Delmar Divide, that is actively trying to revitalize its community.

The type of home equity protection program is undecided currently. The Team reached out to the designers of the Syracuse, NY Home Equity Protection program. The Syracuse model used indices rather than individual loss measures that the earlier assurance programs utilized. Several members of the original Syracuse group volunteered to help us craft a program to suit our purpose. Also, we may have technical assistance from an economist, and a former MO insurance official who designed a successful vacated gasoline tank assurance program.

To raise the Equity Assurance Program Fund, we intend to approach major institutions (universities, foundations, churches, etc.) in St. Louis to invest. An alternative funding source of the Fund could come from state legislation establishing assurance districts like Illinois’ law. The benefit of this neighborhood funded approach is the long-term life of the assurance.

The recent call for legislation by Congresswoman Waters has alerted the appraisal organizations to undertake meaningful reforms. We hope to make a presentation at the National Appraisal Institute convention in Los Vegas this summer. We plan to do the same with other stakeholder groups affected by our innovation.

What is the current composition of your team (types of roles, qualifications, full-time vs. part-time, board members, etc.). How do you plan to evolve the team’s composition as the innovation grows?

Our 3-member team is a unique combination of an urban planner, real estate person and an appraiser. Each brings to the challenge over 30 years of experience, skills, and perspective to address this challenge and carry our innovation forward.

Rosalind Williams, MUP, UW 1971. 50 years creating healthy, sustainable, and equitable communities and the co-founder/president of WITH ACTION. In Ferguson, MO she initiated MO’s PACE legislation, and a Social Compact Drilldown to add value to North County’s black communities. In Kirkwood, MO, as P&D Director, she completed the Meacham Park TIF. Money from the commercial project became the economic engine to revive an adjacent black community. She managed a variety of other housing programs – HIP, Urban Homesteading and acquisition/rehab/resell. Rosalind began her planning career in Ithaca, New York. She helped create and fund Ithaca Neighborhood Housing Services. She was awarded lifetime achievement awards from E/W Gateway Gov’t Council and St. Louis APA Chapter, in 2014.

Barbara Heise is a licensed real estate salesperson with RE/MAX Results in St Louis, Missouri. She has been in the real estate industry since 1974. In addition to representing buyers and sellers, Barbara has expertise as a property developer, property manager and as an assistant to a mortgage banker. As a property manager, Barbara managed large residential apartment complexes in Ferguson, Ballwin and Creve Coeur, MO. Barbara and her husband Ron co-owned Century 21 Classic in the early 1990’s which was the largest Century 21 franchise in St Louis Mo. During that period Barbara was the relocation director. She is a co-founder of WITH ACTION.

Douglas Potts MAI, AI-GRS, founder of Delta Real Estate Analytics LLC. In 2020, retired as Chief Appraiser for Commerce Bank. Actively managed appraisal review and environmental due diligence, for $3 billion in annual loans. 2018-2021 Chair, Appraisal Institute’s National Government Relations Committee, and 2011-2016 AI Region 2, Government Relations Committee member. He remains a member of AI Client Advisory Board. He served on the AI President’s Diversity Panel. Doug is also an active Appraisal Institute instructor, served on the Missouri Real Estate Appraisers Commission, and the Missouri Risk Based Corrective Action Workgroup. Prior work: St. Louis Dev. Corp., MO Tax Commission, and fee appraiser.

How does your team reflect communities directly impacted by the topic you are addressing? Why are you, your team, or organization dedicated to the issue?

Rosalind Williams grew up in a segregated black community in Baton Rouge, LA. Because of her lived experience, she became an urban planner to solve problems and has dedicated her career to housing issues and improving the quality of life of black communities. She played a primary role in annexation and economic integration of the Meacham Park neighborhood, formerly a poor black area adjacent to Kirkwood, MO. The project used TIF funds to raise home values without displacing homeowners. She experienced more difficult housing issues in Ferguson, MO (north St. Louis Co.) due to a weak market and persistent devaluation. When she retired, she continued advocating for inclusive neighborhoods by co-founding WITH ACTION which recently secured $10 M for black neighborhood renewal in University City, MO.

Barbara Heise started selling residential real estate in 1969. The same year, University City neighborhoods north of the Delmar/Olive Divide were targeted by block busters. Barbara was dismayed at the greed and opportunism this was creating in these middle neighborhoods. She became active in local politics and got involved in the stabilization of those neighborhoods. During the time she was owner of H2H, she renovated many homes in the area. The renovations were high quality and each time she had to struggle with the appraisals. Appraisers would not cross the Divide. Many of the people she sold homes to still live there. Now, she is fighting for them to get their values up to par with white areas. She is committed to help revive these declining neighborhoods so that occupants have the same opportunities as those in white neighborhoods.

Doug Potts is a nationally recognized subject matter expert in residential and commercial real estate valuation and bank regulatory policy. His experience as a long-time resident of a marginalized neighborhood in south St. Louis area that has suffered from appraisal gap issues. As chair of the Appraisal Institute’s National Government Relations Committee, he advocated on behalf of fair housing and finance gaps for distressed and marginalized communities. He is currently assisting a consortium of financial institutions on appraisal gap aspects of the St. Louis Gateway Neighborhood Fund, and various advocacy efforts for the Appraisal Institute.

Is there anything else you think we should know about your innovation?

A. The two street views of homes were taken in the West End and Sinker/Debaliviere neighborhoods. The former is a predominately black community, and the latter is an adjacent predominately white neighborhood literally one block south across the Delmar Divide. The difference in home values is glaring. It demonstrates the impenetrable effect of the Delmar Divide, the line of demarcation between black and white, in the interpretation of the Fannie Mae “neighborhood analysis” guidelines. But it also shows the potential of the “restorative appraisal” approach in valuing homes in black communities.

B. In strong housing markets, the use of the Restorative Appraisals technique should increase home values in black communities without requiring a home equity assurance program to sustain those values. On the other hand, our innovation was conceived in the context of a soft regional housing market where black communities have been generationally deprived of investment and its residents have lost hope of economic mobility. In soft markets, there is no threat of gentrification of black neighborhoods, because the whole region is flush with housing stock that is affordable to much of the population. St. Louis MSA was recently recognized as the 4th most affordable place to live in the country. In extremely segregated regions like St. Louis, racism has precipitated overbuilding in white areas and abandonment in black neighborhoods. There are just not enough black residents in the region to fill the homes of those who left. Therefore, to appreciably raise home values, black neighborhoods will need higher income homebuyers to move in to reestablish economic balance of the neighborhood.

The selected demonstration neighborhood must have strong attraction to test the efficacy of our appraisal innovation, as well as a home equity assurance program supported by intentional investment in the success of the community. This means, new construction needs to be avoided and more emphasis placed on rehabilitation of existing structures, the availability of a variety of housing products and incentives at all levels of income, and enhancement of neighborhood amenities. Fortunately, now is the time to undertake this experiment, especially with the large amount of federal funding specifically directed to benefit black communities.