A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals.I think this is likely to be too little, too late. When I was actively suing telemarketers using illegal prerecorded calls to residences in 2003, the worst offenders were mortgage brokers. In the process of going after some of them, I found signs that some of them were engaged in other illegal activities as well, such as defrauding other lenders, defrauding their customers, defrauding the IRS and Arizona Department of Revenue, and transferring assets between entities prior to filing bankruptcy to evade creditors. I found the Arizona State Department of Banking (now known as the Arizona State Department of Financial Institutions), which regulates mortgage brokers, to be completely uninterested in investigating--though they did send some warning letters after I won judgments against brokers, which prompted some of them to pay their judgments. They said that they did not have resources to investigate my claims of violations, even though I offered up specific areas of the law that they are supposed to enforce (they don't enforce the Telephone Consumer Protection Act or FCC regulations).
Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona's real estate market.
The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated. Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy.
While the extent of the fraud is unclear, an Arizona Republic investigation into these cash-back deals found organized groups of speculators have bought multiple homes this way, leaving whole neighborhoods with inflated values. Add to these the individual deals done by amateurs who hear others talk about the easy money they made from cash-back sales.
State investigators and real estate industry leaders want more enforcement and greater public awareness to stop the spread of cash-back deals before the damage mounts.
"Mortgage fraud in the Valley has become so prevalent people think it's a normal business practice," said Amy Swaney, a mortgage banker with Premier Financial Services and past president of the Arizona Mortgage Lenders Association.
Under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to the deal is subject to prosecution.
Felecia Rotellini is a Notre Dame law school graduate and former assistant attorney general who is now superintendent of the Arizona Department of Financial Institutions. Her agency regulates mortgage lenders, state banks and credit unions in the state. Alarmed by what she was hearing from lenders and real estate agents, she has just pulled together state and federal regulators to form an Arizona mortgage fraud task force.
"People need to understand these cash-back deals are illegal and stop," she said. "We are going after mortgage fraud."
There's more on this subject at Ben Jones' Housing Bubble Blog.
UPDATE (January 22, 2007): Arizona Senator Jay Tibshraeny has introduced a bill making mortgage fraud a felony. But it's already criminal activity covered under current laws--adding more laws against it doesn't do anything to cause those laws to be enforced.