Hoping to avoid a real estate crash, a state senator wants to incarcerate everyone from bankers and escrow agents to home buyers who commit mortgage fraud.
The proposal by Sen. Jay Tibshraeny, R-Chandler, would spell out in statute that it is illegal to deliberately misrepresent financial or other material information when buying a home and obtaining a mortgage.
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 SB1221 likely would make prosecutions easier.
Potentially more significant, Rotellini said this law spells out that home buyers 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.
Tibshraeny said the frauds take several forms.
For example, a home buyer may arrange to get cash back from a purchase. That means the “sales price’’ of the house does not represent its true market value.
Similarly, there are situations where appraisals are inflated. In the case of refinancing, that means borrowers can get more money out in cash than the house may be worth.
And mortgage companies may inflate the income of would-be buyers to ensure they qualify for a loan, one they otherwise might not be able to afford.
“None of this was a problem when the real estate market was rising,’’ Tibshraeny said. But he said there are many areas where loans on homes are far more than their worth, a situation he said could cause the collapse of real estate values throughout entire neighborhoods.
Tibshraeny said the innocent victims include people who have bought into these neighborhoods, paying inflated prices that are based on “comps,’’ meaning recorded sales of comparable homes. If these comps are fraudulent, then the new buyers have overpaid.
Rotellini said her agency has broad powers over both mortgage bankers and mortgage brokers.
But she said she has no authority over home buyers who in many cases may be the primary perpetrators of the 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.
She said, though, that even new laws will not immediately result in more prosecutions.
“These cases take a long time,’’ Rotellini said.
“We have to unravel the transactions and trace the documentation through the various professions,’’ she added. “But we have.’’