Mortgage fraud up in state

Reports of Arizona mortgage fraud spiked last year — mirroring a nationwide trend, as lenders scrutinized deals more closely and falling home prices unmasked shams.

In 2006, Arizona ranked No. 11 in the country for mortgage fraud, up from No. 23 the previous year, a report released Wednesday by the Mortgage Asset Research Institute shows.

“The Southwest United States has been an increasing hotbed for mortgage fraud activity,” said Nick Larson, assistant vice president for the Virginia-based group.

With strong employment and rapidly climbing property values, buyers flocked to Arizona, Nevada and other western states — creating a hot market that was easy for “fraudsters” to take advantage of, he said.

“When you have a lot of bidding on properties, it really does strain a lender’s ability to differentiate between a legitimate loan” and schemes, Larson said.

The number of fraud cases reported in Arizona in the first three months of 2006 was 213 percent higher than the same period the year prior, according to the study.

The state also saw an increase in the number of fraud cases involving subprime loans — jumping to No. 6 in the nation from No. 19 in 2005.

The biggest problem is that there’s no licensing for loan officers in Arizona, said Eric Bowlby, president of Amerifirst Financial in Mesa.

Bowlby said he interviewed more than 150 job applicants in the past three months, hired 11 and fired five.

“We have too many people in the industry,” he said. “When you have an uneducated sales force, fraud is going to run rampant.”

The Arizona Department of Financial Institutions, which regulates mortgage companies, doesn’t have enough inspectors to control 50,000 loan officers, Bowlby said. That amount of competition leads to desperation and ultimately to fraud, he said.

The Valley has seen lenders pushing for false appraisals, misusing stated-income loans, conducting cash-back schemes and more, Mesa loan officer Shailesh Ghimire said.

Everybody saw prices going up and tried to make it work, Ghimire said.

Now his business is feeling the pinch of tightening lending guidelines resulting from the subprime market crisis. Last year, it would have been possible to qualify someone with a 580 credit score, but now we need a 620 score, he said.

“The last two months, I’ve seen guidelines change completely,” Ghimire said.

The drop in home prices has helped to bring some fraud to light, the Mortgage Asset Research Institute’s Larson said.

If an investor involved in fraud owes more on the house than it’s worth, then that makes it tough for him to cash out and cover his trail, he said.

Reports of fraud aren’t likely to continue rising as dramatically, but that doesn’t mean fraud will go away, Larson added. It can take years for lenders to discover fraud.

“People who perpetrate fraud for profit will find whatever loopholes there are,” he said.