State targets mortgage fraud

Catherine Reagor
The Arizona Republic
Jan. 23, 2007 12:00 AM

A wave of mortgage fraud in the Valley has prompted state legislation that would define it as a crime punishable by up to 10 years in prison.

A day after The Arizona Republic's special investigation into cash-back mortgage deals, Sen. Jay Tibshraeny of Chandler introduced a bill that would make mortgage fraud a felony.

"Mortgage fraud hurts everyone," said Tibshraeny, who has been working on the legislation for months. "Buyer, beware of a deal that seems too good. The strings your Realtor or mortgage broker pull may be illegal."

Only two states, Colorado and Georgia, have laws specifically regulating mortgage fraud. Most states, including Arizona, must try to prosecute the crime under general fraud laws, which make convictions difficult and less of a deterrent.

Cash-back deals are a newer form of mortgage fraud whose rapid spread in Arizona has alarmed regulators and real estate industry leaders.

The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. The deals inflate home values and can affect values across whole neighborhoods. Homeowners stuck with overpriced mortgages may never recover the difference. Ultimately, lenders end up with bad loans. All this can hurt the Arizona real estate market, the largest segment of the state economy.

Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, is leading a new mortgage fraud task force made up of state and federal agencies. She said the proposed legislation would help investigators crack down on mortgage fraud.

Rotellini said her agency was deluged with calls Monday from people reporting cash-back deals and other potential mortgage fraud.

Sunday's Republic story also struck a cord with people in the real estate industry and homeowners across the Valley as more than 350 people e-mailed or phoned with concerns or accounts of deals they thought were fishy.

From the real estate industry:

Valley appraiser Dennis McMillen said that mortgage fraud is an issue in the housing market but that it's not always due to inflated appraisals. In some cases, he said, "real estate agents and mortgage brokers are withholding the cash-back agreements from the contract, thus the appraiser and title company does not know of these agreements."

Valley real estate investor and marketing executive Francine Hardaway said: "Thank God somebody finally blew the whistle on this. As an investor, I see it all over the place."

Valley attorney Michael Manning represents some groups that were sold "bad loans" as part of the cash-back scheme. "Public awareness coupled with a little proactiveness by local prosecutors will help stem the practice and help prevent a meltdown in the market," he said.

Don Matheson of Re/Max Excalibur Realty of Scottsdale said: "This is a very big problem and very damaging to our real estate market. We need to catch these people and put them in jail."

Many homeowners expressed concerns about fraud in their neighborhood. Dozens of people provided details on cash-back deals or sales that suggested cash-back pricing. Most asked to remain anonymous.

Several readers were alerted to the schemes when they saw homes sit unsold for months and their prices reduced. Then, as the housing market was slowing even more, those homes sold for tens of thousands of dollars more than the previous listed price.

That is the No. 1 warning sign for cash-back deals, regulators say.

Complaints or concerns about cash-back deals can be filed with the Arizona Department of Financial Institutions, azdfi.gov, and the Arizona Department of Real Estate, www.re.state.az.us.

Rotellini said that her agency can take complaints anonymously but that it needs people to testify to prosecute the fraud cases.