More housing brings ‘opportunity for fraud’
Construction workers set an interior frame at a home in Scottsdale. “Arizona is one of the fastest growing states in the country with the construction and housing industry being a key component of our economy. As these industries grow, unfortunately so does the opportunity for fraud,” said the sponsor of the mortgage fraud bill, Sen. Jay Tibshraeny, R-21.

Arizona lawmakers have approved and the governor has signed into law a bill that makes mortgage fraud a crime.
The bill, approved by the Senate on June 11 by a vote of 26-0 and signed by Gov. Janet Napolitano June 13, follows the lead of Georgia, which reports a significant reduction in mortgage fraud cases after passing a similar law two years ago.
The bill identifies as a crime the act of deliberately using or omitting relevant information, with the intent to defraud, during the mortgage lending process.
Backers say the bill gives prosecutors more “efficient tools” in going after those who defraud mortgage lenders.
“The penalties for committing mortgage fraud are serious,” Sen. Jay Tibshraeny, R-21, said after the bill sailed through. “I think that sends a message out that we’re going to prosecute this crime and we’re going to prosecute it aggressively.”
The new law will make mortgage fraud a class 4 felony, punishable by up to three years in prison. A person who engages in a pattern of mortgage fraud is charged a class 2 felony, punishable by up to 10 years of imprisonment.
Tibshraeny worked closely with the chief of the Department of Financial Institutions on the bill. H2040 was originally sponsored by Rep. Mark Anderson, R-18. Tibshraeny had amended it to carry the mortgage fraud language after his bill on the issue appeared to be going nowhere.
“For most people, buying a home is the most important investment they will make and we need to protect the public from predators who are more interested in making money than getting buyers into a mortgage they can really afford,” Tibshraeny said earlier this year.
The FBI looks into two types of mortgage fraud — fraud for profit and fraud for housing. Fraud for profit is usually perpetuated by industry insiders who use false data or omit relevant information to inflate the value of a property, getting more than what the home is worth and pocketing the extra cash.
Fraud for housing usually involves a buyer, who also uses false data but mainly to get a house.
Nationwide problem
The problem in the Valley reflects what’s happening across the nation. One study cites reports from the FBI and the U.S. Department of Treasury’s Financial Crime Enforcement Network, which showed that suspicious activity reports related to mortgage fraud have leapt from just 3,515 in 2000 to more than 28,000 in 2006.
And yet this might only be the tip of the iceberg because such reports are filed only by federally regulated institutions, the study says.
The Mortgage Asset Research Institute says reports on mortgage fraud for loans in 2006 were up 30 percent compared with those made in 2005. But the institute says it will likely take three to five years to uncover the extent of the fraud that year.
Felecia Rotellini, superintendent of the state Department of Financial Institutions, describes the situation in Arizona: “What we are seeing is primarily mortgage fraud for profit, where the real estate transaction is merely the vehicle for stealing money. But it is not traditional theft by any stretch of the imagination.”
She says the fraud involves rigging by insiders and unscrupulous buyers in nearly every step of the mortgage lending process; hence, the need to craft a specific law to deal with the problem.
Mortgage fraud has become more visible as the real estate industry experiences a slump, an assessment shared by Rotellini.
The chief regulator has reasons to be concerned.
The Mortgage Asset Research Institute ranks Arizona No. 6 in fraud related to sub-prime lending. The state was No. 19 in 2002 and has steadily climbed until it reached the top 10 last year.
“We are just starting to uncover [mortgage fraud in Arizona] as property values soften,” Rotellini says.
Schemes leave neighborhoods, lenders on the hook
In one scheme called “cash back,” buyers use inflated appraisals to obtain mortgages for more than the homes are worth, splitting the extra cash with real estate agents, brokers and appraisers. When that happens the value of other homes are affected and are also artificially inflated.
The ultimate loser is the lender and the neighborhood. A person who buys a neighboring house for a higher price may be burdened with a huge loan and property that has a diminished value. A corollary effect is that while the values of property skyrocket, the homeowner may also end up paying higher property taxes.
Doctoring of an appraisal happens when, for example, a property’s value is compared to a house that is far bigger or better instead of a property that closely resembles it. A real estate agent, when involved, helps in the fraud by manipulating a listing of property prices to reflect the inflated prices.
In another ploy called “shotgun scheme,” a buyer sends loan applications to numerous lenders to obtain loans for numerous houses. The buyer, most often in collusion with an insider, hides this fact from lenders.
The Department of Financial Institutions has received complaints from people who have observed overvalued homes being sold in their neighborhood and from appraisers who have spotted inflated values of homes, according to Rotellini.
Loophole a ‘slippery slope’
A key provision of the new law states that a person cannot be held liable for using false information to obtain a loan if he or she did not know the information to be false.
Amy Swaney, past president of the Arizona Mortgage Lenders Association, describes this as going down a “slippery slope.” But she says this can be dealt with later if it creates problems.
“My issue with anything like that is wherever there is a loophole there are people that will use it,” she says.
What is important now is to put into law a crime that can be prosecuted, and that is why the association supported the bill, she said.
“Right now, it is a very difficult crime to prosecute because you have to create a loss. You have to prove that someone has lost something and that’s tough to do,” she says.
A booming market also tends to obscure the fraud. Anyone who has fraudulently obtained a loan and is falling into foreclosure can simply sell the property, she explains.
While not the sole culprit, Swaney thinks fraudulent loans have helped increase the number of foreclosures.
“Arizona has had always a low foreclosure rate but we are starting to see an increase as most of the county has, and much of this is because so many of these loans were created for fraud for profit,” she says.
Regulators and the industry have only just begun to grapple with the extent of the fraud. There is no clear estimate of how much this is costing Arizona. But Swaney says there has been an “incredible number” of civil law suits filed against suspected defrauders.
Success: The Georgia model
In efforts to combat the fraud, officials and the industry looked to Georgia.
After leading other states in mortgage fraud for four years, Georgia was toppled by Florida, according to the Mortgage Asset Research Institute report.
“This dramatic development appears to be due, in large part, to the strong, coordinated stance against mortgage fraud that has been taken by a different number of different groups in Georgia — industry members, mortgage and banking regulators, legislators and state law enforcement officials, coupled with the FBI and the United States Department of Justice,” the report says.
In 2001 groups met and formed the Georgia Real Estate Fraud Prevention and Awareness Coalition. The institute credited the group for “mobilizing, educating and energizing” the attack on residential mortgage fraud.
In 2003, the Georgia Department of Banking and Finance made combating mortgage fraud a priority. Two years later, the state Legislature passed a law addressing the problem, and Georgia became the first state to criminalize residential mortgage, providing severe penalties of up to 10 years of imprisonment.
Other states are following Georgia’s lead. This year Colorado passed legislation requiring the licensing and regulation of mortgage brokers, The Associated Press reported.
“It is my very optimistic hope,” says Rotellini, “that a mortgage fraud law will send the same message and that it will do the same for Arizona.”