In October, the Department of Justice (DOJ) made headlines when they sued Rocket Mortgage for housing discrimination in the form of exhibiting alleged appraisal bias. Linking the nation’s largest home lender to the actions of an independent appraiser may have been an effective way to garner national attention, but it raises many concerns.
Broader questions have now been raised about potential new legal liabilities that businesses in the mortgage industry may be subjected to merely for following the letter of the law. By including Rocket in the lawsuit, the Biden Administration’s DOJ is in many ways also minimizing the real problem of appraisal bias, as missing from all of the headlines and even in the DOJ’s press release was a focus on those actually responsible for the alleged misdeeds. This is all despite the fact that the suit, stemming from a 2021 incident, forwards a compelling case against the third-party appraiser.
There were several errors — large and small — that are difficult to defend. The foremost was using comparable home sales (comps) from a predominantly black neighborhood outside of the recommended radius to inform the home’s valuation, rather than from the largely white neighborhood of the residence — allegedly because the homeowner who requested the appraisal was black herself. But as lenders no longer hire appraisers directly, and instead contract with Appraisal Management Companies (AMCs) — in this case, Solidifi — to then go and locate an accredited appraiser, there is no legal justification for including Rocket in the suit.
In fact, housing market reforms instituted in the aftermath of the 2008 housing crisis clearly removed lenders like Rocket from the appraised value process. The financial crisis was exacerbated by the influence that lenders and real estate agents exerted over the valuation of properties — often even sharing an appraisal target which inflated home valuations. Establishing the doctrine of appraisal independence and enshrining it into law has been one of the more valuable achievements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Yet the DOJ has inexplicably insisted that Rocket bares the final responsibility for correcting this case of appraisal bias and risks undermining this critical firewall in the process.
While Rocket does not have the authority to directly intervene in the process, the law does map out a path for appeal in cases where error or bias are suspected; it’s called reconsideration of value (ROV). But according to federal guidelines, the ROV process must be initiated by the home buyer, not the lender.
Bill Emerson, the president of Rocket Companies, noted that its employees encouraged the customer to begin the ROV process on two different occasions. Each time though, she declined to engage with the process. In his CNBC interview with Becky Quick, Emerson shared a surprising insight into the history of the case nothing how the Department of Housing and Urban Development (HUD): “…got involved and HUD actually took a look at our process and what we did and the team members that were interacting with the client and they found no fault from any of our team members. And so, you know, I find it odd that we’re in the case.”
It was only through an industry bulletin earlier this year that HUD attempted to shift responsibility for appraisal bias onto lenders, without acknowledging how this change conflicts with the legal tenet of appraisal independence. This policy was adopted without an opportunity for the industry to comment and HUD has refused to formally offer any clarification.
In light of these facts, Rocket Mortgage has responded to the DOJ’s action with two significant legal filings: a motion to dismiss the DOJ charges against it and a countersuit against the HUD for its assignment of blame related to the claims of appraisal bias. The hope is that this will resolve the conflict that has been created where compliance with one set of regulations or laws might still result in scrutiny or legal action under different federal interpretations or priorities.
When federal agencies bypass the law to advance a political agenda, it harms honest actors — like Rocket — and poses a threat to all consumers as well. It is counterproductive bureaucracy like this that President-elect Donald Trump’s Department of Government Efficiency (DOGE) should (and undoubtedly will) seek to dismantle. Thoroughly reviewing the haphazard regulation-by-enforcement that has become a staple DOJ strategy should be the starting point for DOGE’s assessment of government waste, but comprehensive HUD reform should be a close second.
In a recent Wall Street Journal letter-to-the-editor, the former HUD deputy secretary, Brian Montgomery, has offered HUD as a model of efficiency that Musk and Ramaswamy can build on. As Scott Turner, President Trump’s nominee to lead HUD, takes the helm, the lessons from these misadventures with Rocket should be a guide. If increasing homeownership and affordability is HUD’s goal, fracturing the protection of appraisal independence and returning to the errors that caused the 2008 housing crisis is not the path forward.
Montgomery finishes with some advice that Turner should take to heart. He notes that HUD demonstrates that federal agencies can be efficient “through smart management and strong partnerships with the private sector.” Rocket’s lawsuit demonstrates that the lending industry desires such a partnership, but that it will not remain silent when unfairly targeted for adhering to the law. Come January 20th, resolving this issue quickly should be a top priority.
Chuck Meyer is an executive director at PGIM Real Estate.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
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