State agency seeks help as number of mortgage fraud cases rise

Burdened by a climbing number of mortgage fraud complaints, the state agency that regulates Arizona lenders is looking to outside accounting firms and fraud examiners to help investigate cases.

The Department of Financial Institutions recently awarded 19 contracts to companies that will be assigned mortgage fraud cases as necessary. Three firms have already been hired.

“We have more complaints than we have examiners and investigators that can handle them on staff,” Superintendent Felecia Rotellini said.

Four in-house investigators work on a dozen or so cases at a time, and the department currently has 89 mortgage fraud complaints — the majority of which have yet to be looked into.

“We’re still trying to log all of the complaints that we’ve gotten,” department spokesman Jack Hudock said. “They’re all going to be investigated. The question is how quickly.”

And complaints continue to pile up.

Every time someone from the department gives a public talk, the phone starts ringing off the hook, Hudock said.

Reports of mortgage fraud have jumped statewide in the past year.

In 2006, Arizona ranked No. 11 in the country for mortgage fraud, up from No. 23 the year before, a study by the Virginia-based Mortgage Asset Research Institute shows.

The number of fraud cases involving subprime loans also increased with the state ranking No. 6 nationally, up from No. 19 in 2005.

The spike reflects a growing trend nationwide, as home values sink and lenders examine deals more closely.

In 2000, the U.S. Department of the Treasury collected 3,515 Suspicious Activity Reports nationwide involving mortgage fraud from federally-insured financial institutions, the study shows.

Last year, there were 28,372 reports.

Fraud is always an issue, but it becomes more visible in tougher real estate markets, Arizona Mortgage Lenders Association president Chris Mozilo said.

Home values drop, sales slow and people are unable to sell or refinance — often leading to foreclosure.

It can sometimes take years for fraud to surface as interest rates on adjustable-rate loans reset and borrowers miss payments.

“Because of the delinquencies they’ve seen and fraud that’s been uncovered, lenders are more closely scrutinizing transactions,” Mozilo said.

Contracting out investigations is necessary because the Department of Financial Institutions has long been understaffed, he added.

Often document-heavy and complex, mortgage fraud cases can be time consuming and require skill in tracing money, Rotellini said. Independent contractors can bring some of that expertise, she said.

The department has already initiated 40 investigations in the past six weeks — at a cost so far of $12,000 — using companies with existing state contracts.

Any work resulting from the established contracts or new ones will be paid for with civil money penalties, which are collected from licensees who have been disciplined, and then put into a revolving fund.

That allows the department to start up more investigations without hiring more full-time employees through the general fund or putting the burden on taxpayers or compliant licensees, Rotellini said.

Jeff Brock, a loan officer with The Mortgage Advantage in Tempe, said he still hears about instances of fraud on a weekly basis despite the housing market slump.

Ramping up investigation efforts will make work easier for reputable lenders by weeding out some of the “flyby-night” companies, Brock said. “We’re losing deals to companies who are willing to do deals that aren’t OK to do,” he said.