Mortgage fraud dives in Arizona as lenders enforce tight standards

Stricter lending standards have made it tough for homebuyers to qualify for financing, but the clampdown on exotic mortgages may have led to some positive news, too - less mortgage fraud.

Misty Williams on Real Estate Blog

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In 2006, Arizona vaulted to No. 10 in the country for mortgage fraud, following the collapse of property values, according to the Mortgage Asset Research Institute. But last year, the state fell to No. 17 in the nation for fraud, the data firm recently reported.

The improvement, local loan officers say, stems in part from the disappearance of risky mortgage products from the marketplace.

"Up until a year ago or so, we had loan products that were literally called 'liar's loans,' " said Jill Hoogendyk, vice president of advocacy for the Arizona Mortgage Lenders Association.

The use of loans that required no documentation of income or assets was rampant during the boom. The mortgage products made it easy for borrowers to inflate their incomes to qualify for more expensive houses.

Nationwide, 60 percent of 2007 fraud cases reported to the research institute contained application fraud, such as lying about employment or income. The information service company has collected reports of fraud from mortgage firms and insurers for more than a decade.

Today, no-documentation loans are gone.

People still attempt to create false documents, but that's a much harder fraud to perpetrate, Hoogendyk said.

The drop in property values and decline in market activity have also led to fewer opportunities for fraud, said Mitchel Medigovich, president of Cattlemen's Mortgage and Investment. "The sheer number of people who are originating loans is substantially less than (it was) a couple years ago," he said.

Last year, the state Legislature also passed a bill to make mortgage fraud a felony. "I think it's the first step," Medigovich said.

The industry has also been pushing for years for legislation that would require loan officers to be licensed, Medigovich said. It's been relatively easy for anyone to join the industry, he said.

"You had people who had little or no education in the mortgage business counseling people on their greatest asset," he said.

People may think twice before becoming a loan officer if there is a licensing requirement, Hoogendyk said. There would be a cost involved, such as renewing the license annually and ongoing education.

Loan officer training is also huge because officers need to understand the implications of any dishonesty, she said. Hoogendyk added that lenders have ramped up quality control at all levels.

Home appraisals are being reviewed frequently. Loan officers are calling employers at the very end of the mortgage process to make sure the borrower is still at the same job.

"Lenders are doing more to catch fraud than ever before," said Roy Meshel, president of State Mortgage.

The Scottsdale-based company runs loans through a number of systems to check for things like valid Social Security numbers and tax forms. With today's technology, it's easy to create a fake W-2, so the company requests IRS transcripts, Meshel said.

"We've caught a few people with fake tax returns," he said.

The firm also runs loans through a national database that allows it to see if a borrower has other pending mortgage applications.

During the boom, speculators would buy five houses at a time and lie to each lender, saying they would be living in the houses, he said.

Meshel added that, in the past, companies would run about 10 percent of loans through in-depth background checks. Today, State Mortgage runs every loan through the same rigorous process.

"I think a lot of mortgage companies now more than ever are doing what we're doing," he said.