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?" Pennsylvania 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 city for the 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 thriving 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 Mortgage, 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 Poconos 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 question valuations from Percudani's company. Other common methods of creating revenues include investors and others buying distressed properties 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 standard 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 brokers, their business will dry up. Do you think a county appraiser would do a lot better 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 information, 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, Percudani 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." Stranieri 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 interview. "The value goes up. The value goes down." 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 homeowners from the desire to "massage the value of their homes? (Hint: Think about a homeowner's motivation.)