The owner of this Oakland property became one of several nonwhite California homeowners to file a complaint about potential bias in home appraisals after her duplex was valued at several hundred thousand dollars less than expected. Federal regulators are debating changes to the industry to address the nation’s legacy of housing discrimination.

Late last year, members of a Black family from the North Bay alleged that an appraiser lowballed them by hundreds of thousands of dollars before they “whitewashed” their home. It was only after they removed personal items and asked a white friend to stand in for a second appraisal, according to the family’s lawsuit, that the home’s perceived value shot up by $487,500.

The case was an extreme example of similar complaints by non-white homeowners from Oakland to Stockton to Los Angeles, putting high-priced California at the center of a national debate over how to address concerns about lingering racism in the home appraisal process.

Last week, a new report to federal financial regulators cites the North Bay family’s case in a review of how racial bias in home appraisals has evolved since last century’s explicitly discriminatory housing laws — and lays out a potential path to reform. Among the recommendations: changing the way appraisals are regulated, doing more to diversify the ranks of appraisers and releasing more federal appraisal data.

As it stands, local fair housing attorneys say the appraisal process can amount to “present-day redlining,” because of how non-white residents are still disproportionately locked out of the wealth that favorable home financing can provide. But it’s only in recent years, the report notes, that more cases like the North Bay family’s have made it to the courts and media.

“It’s not that the problems didn’t exist before,” said Peter Christensen, an attorney who contributed to the new report to appraisal regulators. “But the complaints that we’re hearing now — that’s the new phenomenon.”

Cases like the one brought by Paul Austin and Tenisha Tate-Austin in Marin City illustrate how high the financial stakes of appraisal issues can be in expensive housing markets like the Bay Area. The North Bay couple alleged in a federal fair housing lawsuit last year that their renovated home was unreasonably devalued by an appraiser initially hired during a refinancing.

That is, until the family ordered a second appraisal, swapped their own photos with a white friend’s and left their home during the follow-up visit.

“The Austins erased any evidence of their racial identities inside their house, even asking a white friend to pose as the homeowner during the inspection,” according to the lawsuit. “This different appraiser arrived at a value of $1,482,500 — nearly half a million dollars higher.”

Part of the challenge in addressing concerns like the Austin family’s is that appraisals are a technical and subjective business, which the new report notes is largely “self-regulated” and severely lacking non-white professionals. A private organization, The Appraisal Foundation, was authorized by Congress in 1989 to set most day-to-day standards. States have their own oversight agencies to clarify localized standards, like California’s Bureau of Real Estate Appraisers.

The new report was created for regulators on an Appraisal Subcommittee of the Federal Financial Institutions Examination Council, an interagency group with ties to agencies including the Federal Reserve, the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau. The appraisal report was authored by the National Fair Housing Alliance and attorneys focused on fair housing and appraisals.

In addition to the appraisal industry’s unusual system for regulation, the new report explains how the process grew out of the country’s legacy of discriminatory housing policies that relied on an “unfounded association between race and risk.” One 1967 appraisal textbook quoted in the report noted that “values change when people who are different from those presently occupying an area advance into and infiltrate a neighborhood.”

Many state and federal laws have since barred racial discrimination in housing, and government bodies like the Federal Housing Financing Agency have specified in recent years that “racial and ethnic composition of the neighborhood should never be a factor that influences the value of a family’s home.” Industry groups including the Appraisal Foundation have also vowed to invest in rooting out bias. Still, the new report cites current examples of appraisers injecting racially coded language into reports, like one unspecified instance where a once “White-Only” neighborhood was also described as a “White-Flight Red-Zone” that is now mostly “Working-Class Black.”

It all comes with a high financial cost. The Brookings Institution estimates that owner-occupied homes in majority-Black U.S. neighborhoods are undervalued by some $156 billion. Freddie Mac has calculated a 5.2% “appraisal gap” between white and Black neighborhoods, where about 12.5% of properties in Black census tracts receive a lower appraised value than the contract price, compared to 7.4% of properties in white areas.

“The issue was not limited to just ‘a few bad apples,’” the new report noted. “Rather, the majority of appraisers reviewed were more likely to show an appraisal gap for properties in Black or Latino census tracts.”

Report contributor Christensen notes that frustration with appraisals has become widespread, transcending racial lines, during the surge in COVID-era bidding wars and low-interest refinancing. In busy markets like the Bay Area, it can take weeks to arrange an appraisal, and the results are often difficult for home buyers or owners to contest.

The report — the first of several expected to propose new reforms to regulators in the coming months — suggests several ways to both ease the pressure and increase equity. To lower barriers to entry to becoming an appraiser, the report suggests revising requirements for the number of hours would-be appraisers must work, and whether they must work under a supervisor already well-connected in the field.

The authors also propose ways to change the power structure of the governing Appraisal Foundation. Among the suggestions are repealing a requirement for financial donations to appoint board members, and adding consumer and civil rights advocates to the body. Christensen said policymakers could ultimately go farther.

“They’re like, ‘How is it that this private group of people over there is making all these rules and standards?’” Christensen said. “That is something that will really be looked at.”

Lauren Hepler is a San Francisco Chronicle staff writer. Email: lauren.hepler@sfchronicle.com Twitter: @LAHepler

Lauren Hepler covers housing and neighborhood retail for The San Francisco Chronicle's race and equity team. Her past stories on housing, labor and climate issues have been published by the New York Times, the Los Angeles Times and the Guardian, among others. She was previously a staff economic reporter at CalMatters, Protocol and the Silicon Valley Business Journal. Lauren grew up in Ohio, studied U.S. history at George Washington University and has a master's degree from UC Berkeley's Graduate School of Journalism.