Question

Case Study 1

Hotel worker Danny Ruiz was living with his wife and four children in a cramped New York apartment when he saw a television ad promising the family a way out. “Why rent when you can own your own home?” Penn- sylvania builder Gene Percudani asked. The company even offered to pay his rent for a year, while he saved for a down payment. So the Ruiz family fled the cityhe Pocono Mountains, where they bought a three- bedroom Cape Cod home for $171,000. However, when they tried to refinance less than two years later, the home was valued at just $125,000. “I just about flipped,” said Mr. Ruiz. Later Mrs. Ruiz remarked about her husband, “He went nuts.” Percudani, a 51-year-old native of Queens, New York, built a thriv- ing homebuilding business in this market, running folksy television ads offering New Yorkers new homes in Pennsylvania. If they joined Percudani’s program, called “Why Rent,” homeowners would find financing through another of his companies, Chapel Creek Mort- gage, which brokered loans from J. P. Morgan Chase and the company’s Chase Manhattan Mortgage unit. For years, the “Why Rent” program appealed to workers with modest salaries, such as Eberht Rios, a truck driver for UPS. Rios bought a home in the Poco- nos for $140,000. This year, when he tried to refinance, he was told the home was valued at only $100,000. One local appraiser, Dominick Stranieri, signed off on most of the “Why Rent” deals that state officials now say were overpriced, including the Rios and Ruiz homes. Percudani’s firm picked Stranieri as his appraiser because of his quick work and low fee of $250, instead of the typical $300 to $400. In exchange for a steady stream of work, Mr. Stranieri accepted without ques- tion valuations from Percudani’s company. Other common methods of creating revenues include investors and others buying distressed proper- ties and then, using inflated appraisals, selling them for a big profit. In order to secure the efforts of a “dirty appraiser,” those involved with the fraud would pay up to $1,500 under the table on top of the appraiser’s stan- dard fee of $400. Another unique twist to the plot is that few of the people involved in making mortgage loans have a long- term interest in them. Traditionally, bankers made loans directly and held them, giving the lenders a strong incentive to find fair appraisals to protect their interest. Today, however, many appraisers are picked by independent mortgage brokers, who are paid per transaction and have little stake in the long-term health of the loans. Many lenders have also lost a long-term interest in their loans, because they sell them off to investors. Appraisers increasingly fear that if they don’t go along with higher valuations sought by bro- kers, their business will dry up. Do you think a county appraiser would do a lot bet- ter than a private practitioner? Joel Marcus, a New York–based attorney recently had his property valued at $2.2 million by a county appraiser, up from $2 million the previous year, which means a $7,200 jump in his property tax bill. Based on recent home sales in his neighborhood, Marcus believes his property is valued at between $1.7 and $1.8 million. Based on this informa- tion, Marcus has appealed his appraisal. Although a good appraisal requires doing hours of legwork, visiting a property to check its condition, and coming up with at least three comparable sales, Percu- dani says he isn’t surprised that later appraisals, or even different appraisals made at the same time, could result in different values. “Appraisals are opinions,” he says. “Value, like beauty, is in the eye of the beholder.” Stra- nieri and Percudani deny any wrongdoing and say they operated independently and that any home that declined in value did so because of a weak economy. “It’s like buying a stock,” Percudani says in an inter- view. “The value goes up. The value goes down.” Questions

1. How is an opportunity created to commit appraisal fraud? Does the appraiser act alone, or is collusion routinely involved?

2. How is appraisal fraud detected? Is intent to deceive easy to prove in appraisal fraud?

3. What pressures or perceived pressures can motivate appraisers to make faulty valuations?

4. How do appraisers rationalize their fraudulent behavior?

5. Why would a county perceive pressure to fraudulently inflate property values?

6. What controls would help to prevent appraisal fraud?

7. What natural controls exist to prevent homeownersfrom the desire to “massage the value” of their homes? (Hint: Think about a homeowner’s motivation.)

Answer 1

1.Appraisal fraud Occurs when a home's value is deliberately overstated or understated. it is overstate so that more money can be obtained by the borrower in the form of a cash-out refinance, by the seller in a purchase transaction, or by the organizers of a for-profit mortgage fraud scheme.it includes cases where the home's value is deliberately understated to get a lower price on a foreclosed home, or in a fraudulent attempt to induce a lender to decrease the amount owed on the mortgage.

When there were multiple people involved in the fraud, the frequency of corruption schemes jumps and the misappropriation of non-cash assets was much more common when collusion was involved.

they may work singly or more people can be involved too.

2.Many appraisers performing fraudulent work are newly licensed and don't have traditional internship experience. They are not professionally trained andthey do not subscribe to the high standards of the Code of Professional Ethics of the Appraisal Institute. The combination of data analysis technology and outdated appraisal practices, make deceptive appraisals easier to detect.

3.some appraisers give in to pressure because they believe that if they do not give in they will have very little work and pressure from real estate agents for the appraiser to simply endorse the contract price isalways there.

4.ways appraiser rationalize their actions are

i)Denial of responsibility

ii)Denial of injury

iii)Everyone else is doing it

iv)Entitlement

6.ways of preventing appraisal frauds are by Knowing the parties with whom you are doing business . there should be Clear directives as to the responsibility of all the employees and the escalation process when they suspect fraud. there should be an awareness of the major types of origination and servicing fraud. shpuld be an understanding of underwriting and servicing red flags and their use. A list of resources available to them to detect and investigate fraud.one should always be alert of all the transactions being done by the appraiser and should be aware of his rights.