The US Department of Justice recently filed a lawsuit against Rocket Mortgage that they frame as a necessary strike against racial bias in the housing market—more specifically, in the area home appraisals.
The National Fair Housing Alliance has confirmed the widely accepted understanding that “home value has been the cornerstone of intergenerational wealth in the United States.” Thus, any racial bias in the appraisal process strips equity and limits a family’s financial opportunities.
Because the underlying concern is real for working families, the DOJ lawsuit might superficially appear to be a laudable intervention to correct what has historically been a genuine social injustice.
The lawsuit alleges that an independent appraiser, contracted by an Appraisal Management Company (AMC), discriminated against a Black homeowner who wanted to refinance her home with Rocket. The homeowner then demanded that Rocket correct the appraisal. The DOJ maintains that the proper relief was for Rocket to intervene with the appraiser. But therein lies a huge a huge problem. The law prohibits a lender intervening in the appraisal process.
The 2007-2010 housing crisis was aided by widespread conflicts of interests. Lenders and real estate agents wilfully influenced appraiser valuations, leading to larger loans and larger profits. Appraisers knew their continued employment depended on meeting the numbers buyers and lenders needed. A massive overvaluation of the housing market was a key factor that led to a larger financial crisis that brought tremendous economic upheaval.
Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, attempting to prevent a repeat of the crisis. Central to protecting the housing market was establishing of appraisal independence. This legal firewall bars lenders from influencing appraisers. The law also standardized the use of Appraisal Management Companies (AMC), which are responsible for contracting with qualified appraisals on the homebuyer’s behalf.
Although the lawsuit attempts to remedy racial appraisal bias that harms struggling homeowners and buyers, researchers at the American Enterprise Institute have warned: “The politicization of home prices to address perceived valuation inequities could lead to misvaluations on a massive scale.”
No one should forget how the housing crisis hurt underserved communities. Studies have shown, that “black and Latino households [were] much more likely than white households to experience foreclosure, losing ground on long-term socioeconomic gains in the process.” A repeat of 2007-2010 would be the worst outcome for these communities.
This type of lawsuit undercuts key protections that were meant to both protect consumers and the housing market. Rocket Mortgage’s legal standing appears to be strong. Still, the best move would be to secure appraisal independence, protect consumers, and ensure the health of the housing market via a dismissal of the case.
