Have You Been Victimized by Mortgage Fraud?

This past week, the Arizona legislature passed a bill criminalizing mortgage fraud. Specifically, the bill criminalizes so-called cash-back financing in which a prospective buyer pays an artificially inflated price for a home, receives a loan for the high sales price, and pockets the difference between the loan amount and the actual residential home value. According to the Arizona Republic,

the deals can hurt lenders financially and inflate other house values.

Apparently Arizona has recently been a haven for mortgage fraud problems,

Arizona ranks seventh in the country in the number of mortgage-fraud cases.

As a result of these recent mortgage fraud problems, Governor Napolitano signed House Bill 2040 last week on June 13 which states as follows:

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 MATERIAL 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 MATERIAL 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 LOAN 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 MATERIAL OMISSION.

Although many deals under this statute would be considered fraudulent and would help prosecutors and regulators stop deceptive practices, I am not sure that all cash-back financing deals involve fraud. In fact, I can envision at least one scenario when cash-back financing actually makes economic sense and creates value for the buyer, the seller, the lender and the real estate community. For example, I do not believe a buyer who pays a high price for a home and, based upon proper independent appraisals, intends to use cash back financing to construct property improvements which will in turn create value in excess of the purchase price should be charged with mortgage fraud.

In contrast, the statute should certainly apply to somebody who never intends to take possession of property and pay a mortgage, choosing instead to pocket cash back proceeds and disappear after leaving a trail of financial victims such as the mortgage lender. Perhaps the worst victims in this scenario are neighbors who had nothing to do with the financial transaction yet who suffer a reduction in home equity because foreclosure sales dramatically reduce property values.

I commend the state for passing this statute and believe it distinguishes between the appropriate and inappropriate real estate deal. I hope that in the context of enforcement actions, prosecutors and regulators are able to separate the good from the bad and only prosecute the real criminals. Do you think this statute will help homeowners in Arizona stabilize and protect their property values or has the damage already been done and does this really amount to too little too late? I’d love to hear your thoughts.