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They are echoes of historical redlining by the rippling algorithms they use automated valuation modelsconfusing their results to this day?
Not after checking for physical attributes such as house area and lot size, according to a studies by Veros Real Estate Solutions.
Veros — Fannie Mae and Freddie Mac’s principal architect and technology provider Unified data portal on reinsurance — test the company’s VeroVALUE Automated Valuation Model (AVM) by looking at old maps created by the Home Owners’ Loan Corporation (HOLC) in the 1930s.
The maps, which academics concluded used racially biased ratings to assess a lender’s perceived risk in more than 200 cities, were preserved Inequality Mapping Projectcooperation of four universities.
“These signs were a tool for redlining: they made it harder or harder for people in certain areas to access mortgage financing and become homeowners,” the academics, who made the maps available online explain on the Mapping Inequality website. “Redlining directed both public and private capital toward native-born white families and away from African-American and immigrant families. Since homeownership was arguably the most significant means of intergenerational wealth building in the United States in the twentieth century, these redlining practices of eight decades ago had long-term effects in creating the wealth inequalities we see today.”
Veros researchers used historical maps from the Mapping Inequality project to identify them four areas of Los Angeles where ethnically homogenous blue zones adjoined “dangerous” red zones classified by the HOLC as having “low home ownership rates, old housing structures and “undesirable populations”. “
Reena Agrawal
Veros economists Reena Agrawal and Eric Fox then analyzed VeroVALUE AMV-generated home price estimates for all single-family homes in a well-defined area, usually two or three city blocks, on either side of the blue and red zone boundaries.
They concluded that, even after nearly nine decades, homes located in historically red-light districts “tend to have smaller square footage, smaller lot sizes, and higher variances in quality and condition compared to homes in non-red-light areas, leading to lower median property values “.
But after checking the physical properties of the homes, the researchers were satisfied that the VeroVALUE AVM returned comparable estimates for properties on either side of the redline.
The Veros researchers cautioned that their results may not apply to other cities and do not prove that other AVMs will not be tripped up by historical redlining.
Eric Fox
“While the current study analyzed red-highlighted neighborhoods in Los Angeles, we believe it is important to continue studying other historically red-highlighted neighborhoods in metros across the United States to confirm that similar conclusions are obtained,” Agrawal and Fox concluded.
“This is because VeroVALUE is modeled to include comparable properties in a radius around the target property and does not include any protected class variables or geographic boundaries associated with HOLC maps.”
While the study demonstrates that the VeroVALUE AVM does not value homes differently based on their location on the Los Angeles HOLC maps, “all AVMs are not created equal, and therefore performance may vary among other AVMs,” the Vero researchers cautioned.
“Based on the results of our analyses, we recommend that other AVM providers conduct similar research to help them demonstrate whether their AVMs also have no algorithmic bias with respect to red-lining areas or with respect to the racial makeup of neighborhoods.”
Veros says a previous study demonstrated that its VeroVALUE AVM is free of bias in minority communities.
They are currently working with federal regulators quality control standards for AVM which could require lenders to demonstrate that their use of valuation models does not violate fair lending laws, other AVM providers may very well follow suit.
“In an environment where housing finance stakeholders consider both accuracy and fairness across the valuation spectrum, our VeroVALUE AVM is a proven and invaluable tool to achieve both goals,” said Fox. declaration.
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