Defaults unveil fraud issues in mortgages

It's becoming clearer that mortgage fraud is behind many of the bad loans causing the nation's financial crisis.

On the heels of the announced bailout plan, news of the FBI's investigation of mortgage giants Fannie Mae and Freddie Mac for mortgage fraud leaked out. Several other big lenders are part of the crackdown.

Arizona's mortgage fraud problem is growing with the downturn. Many cases are becoming more apparent as more loans are defaulted on. Complaints about illegal lending practices have jumped 79 percent this year from last year's record level, according to the Arizona Department of Financial Institutions. OAS_AD('ArticleFlex_1')

Before this jump, Arizona was already in the top 10 for the most fraud cases reported by lenders.

"Now with more loans in default, lenders are looking at the underlying loan documentation and finding fabrications and misstatements that were so sophisticated they were undetectable as fraud before," said Felecia Rotellini, superintendent of the Department of Financial Institutions, which regulates lenders, escrow agents, mortgage brokers and soon mortgage originators thanks to Arizona legislation passed earlier this year.

The Department of Financial Institutions sounded the alarm about mortgage fraud, particularly cash-back deals, in late 2006, as the Valley's housing boom was slowing. The state agency led the effort to create an Arizona mortgage-fraud task force that includes other regulators and law-enforcement agencies.

The Department of Financial Institutions has 123 open investigations into mortgage fraud and other illegal lending across Arizona, although most cases are in metropolitan Phoenix.

Rotellini said now mortgage fraud is showing up deals to stave off foreclosure such as short sales.

Foreclosure scams

Last week, the Arizona attorney general cracked down on an alleged foreclosure-rescue scam, which involved short sales.

The Attorney General's Office reached a settlement with Harvest Properties of Tucson over a consumer lawsuit that accused the company and its owners of committing foreclosure-rescue fraud and mortgage fraud.

The settlement, which does not include admission of wrongdoing by the company, requires Harvest's owners and manager to pay $350,000 in restitution to about 100 people.

"In these difficult economic times, I will aggressively pursue anyone found to be deceiving Arizonans who are in or facing foreclosure," said Arizona Attorney General Terry Goddard.

Harvest's owners and managers include Colin Sterling Reilly, Robert Harrington Reilly and Jill Lynae Reilly.

The suit alleged Harvest used deceptive practices to buy foreclosed homes through short sales at discounted prices.

Harvest also did business as HomeVestors and Harrington Sterling Holdings.

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