On the heels of The Arizona Republic’s ground-breaking article on cash back at closing schemes, an Arizona State Senator is attempting to revise a state statute to make it a crime to misrepresent financial information when attempting to purchase a home or obtain a home mortgage. AZ State Senator Jay Tibshraeny (R, 21st Dist.) yesterday introduced Senate Bill 1221, which states:

A. A person commits residential mortgage fraud if, with the intent to defraud, the person does any of the following:

1. Knowingly makes any deliberate misstatement, misrepresentation or omission during the mortgage lending process that is relied on by a mortgage lender, borrower or other party to the mortgage lending process.
2. Knowingly uses or facilitates the use of any deliberate misstatement, misrepresentation or omission during the mortgage lending process that is relied on by a mortgage lender, borrower or other party to the mortgage lending process.
3. Receives any proceeds or other monies in connection with a residential mortgage that the person knows resulted from a violation of paragraph 1 or 2 of this subsection.
4. Files or causes to be filed with the office of the county recorder of any county of this state any residential mortgage loan document that the person knows to contain a deliberate misstatement, misrepresentation or omission.

B. An offense involving residential mortgage fraud shall not be based solely on information that is lawfully disclosed under federal disclosure laws, regulations and interpretations related to the mortgage lending process.

C. A person who violates this section is guilty of a class 4 felony, except that a person who engages or participates in a pattern of residential mortgage fraud or who conspires to engage or participate in a pattern of residential mortgage fraud is guilty of a class 2 felony.

D. For the purposes of this section:

1. “Mortgage lending process” means the process through which a person seeks or obtains a residential mortgage loan including solicitation, application, origination, negotiation of terms, third-party provider services, underwriting, signing, closing and funding of the loan.
2. “Pattern of residential mortgage fraud” means one or more misstatements, misrepresentations or omissions that are made during the mortgage lending process, that involve two or more residential properties and that have the same or similar intents, results, accomplices, victims or methods of commission or are otherwise interrelated by distinguishing characteristics.
3. “Residential mortgage loan” means a loan or agreement to extend credit to a person that is secured by a deed to secure debt, security deed, mortgage, security interest, deed of trust or other document representing a security interest or lien on any interest in one-to-four family residential property and includes the renewal or refinancing of any loan.

So, what does all of this mean? According to the Arizona Daily Star:

Just a single offense could result in a 2 1/2 year prison term. And those who are involved in multiple schemes potentially face five years behind bars.

Felecia Rotellini, superintendent of the state Department of Financial Institutions, acknowledged there already are both criminal and civil laws designed to go after those who commit fraud. And she said her agency already has managed to convict people involved in such schemes. But Rotellini said SB 1221 likely would make prosecutions easier. Potentially more significant, Rotellini said this law spells out that homebuyers involved in these kinds of frauds are equally culpable — and can be equally punished. “It will help to cover the gamut of players,” she said.

Rotellini goes on to tell the Daily Star that while her agency has broad powers over both mortgage bankers and mortgage brokers, she has no authority over home buyers, who in many cases may be the primary perpetrators of real estate fraud:

“In fact the buyer in these cash-back schemes is the primary perpetrator,” Rotellini said. “They’re the one that’s getting the loan that’s been misrepresenting the value of the property or other aspects of it.” If nothing else, Rotellini said she believes having a specific law on the books making mortgage fraud a crime will act as a deterrent. “Maybe that’s wishful thinking,” she said. But Rotellini said a new statute — and the stiff penalties — might convince would-be schemers to reconsider.

Left unchecked, cash back at closing deals cost homeowners and lenders millions of dollars, and according to an in depth article in yesterday’s The Arizona Republic, could erode confidence and values in Arizona’s real estate market. From yesterday’s online edition of the Republic:

A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals. 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.

As The Republic correctly points out, under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to a deal involving inflated valuations is subject to prosecution. Need proof? As I have mentioned before, all you have to do is look at a 1003 (that’s the code name for the Uniform Residential Loan Application) that every homebuyer must sign when applying for a home loan. The 1003, which is authorized by Title 18 of the United States Code, Section 1001, is very clear in this regard. To paraphrase, you cannot lie on a loan application or any other document related to a transaction. When a buyer, appraiser, real estate agent, loan officer, or another party provides a false statement of a property’s value on a 1003 or any other document, they have lied, which means they have also broken the law.

More from The Republic:

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.”

As I told Catherine Reagor, The Republic writer who penned the article, Arizona was like a housing gold rush for speculators from California, Florida and Texas a few years ago, but home prices stopped climbing, and speculators got greedy. Now the cash back scam is going to make the savings and loan crisis of the 1980s look like a soft landing.

If you suspect or are aware of cash back deals involving Arizona home sales, contact Catherine Reagor, who is looking for additional help with The Republic’s continuing coverage of this story. Reagor can be reached via email by writing to catherine.reagor at arizonarepublic dot com.

The FBI just released its latest figures on real estate fraud, and for some parts of the country, the news isn’t very good! According to the FBI, Southern California has the most reports of mortgage fraud in the country, topping the closest region in the number of reported cases by over 35 percent. Since January 1 of this year, the FBI has received 2,293 reports of suspected fraud in the Los Angeles area alone, and 4,228 in the Southern California region.

Real estate industry insiders in a number of ways initiate reports of Real Estate and Mortgage Fraud to the FBI. If a lender identifies a suspect, it is required to report the suspected activity to the FBI. However, according to the Los Angeles Times, only lenders that operate as banks are required to file suspicious activity reports with the FBI. That’s a growing number of lenders, say the LA Times, but banks account for less than one-half of all mortgage loans (mortgage brokers, which arrange loans but do not fund them, are not required, for some reason, to file reports with the FBI).

The FBI’s list of Real Estate and Mortgage Fraud hot spots thus far for 2006, with the number of cases reported through September 25, is as follows:

1. Los Angeles, California: 2,293
2. Atlanta, Georgia: 1,459
3. Chicago, Illinois: 1,245
4. Miami, Florida: 1,191
5. San Francisco, California: 942
6. Detroit, Michigan: 914
7. New York, New York: 907
8. Dallas, Texas: 635
9. Phoenix, Arizona: 631
10. Houston, Texas: 618