A scam called “cash-back deal” is becoming commonplace in the Arizona Real Estate Market; some citizens don’t even suspect it’s illegal.
This is how it works: a buyer purchases a home at a price higher than its market value, but the seller only gets the amount he’s asked for, i.e. the home’s market price. Typically an outdated appraisal, stating the higher price, is involved, and the seller is asked to return the extra money, to be used for renovations or under some other excuse. Then a mortgage for the amount paid (higher that the market value) is taken and the extra cash is divided among the buyer, the agent, appraiser or anyone else who’s participated in the scam, which may sometimes include the seller himself. The one who loses his money is the lender, because when the house is foreclosed, its selling price doesn’t cover the loan amount.
It also leads to inflated home values in the region, which means that anyone wishing to sell their home may have to accept a price lower than the actual value, and homeowners may suddenly owe more on their mortgage than they would get by selling the property. Loss from mortgage fraud has increased during the last few years, reaching approximately $1 billion in 2006. Lenders and buyers are advised to look for warning signs, such as agents offering to buy a house for a higher price or requests that the property is removed from any listings, so that the original price can’t be found.
The scam is so popular, many think it’s normal business practice, but officials are trying to explain that the procedure is illegal under Federal Law, because the home’s value is misrepresented to the lender. Participants are punishable by fine or imprisonment, and any agents or appraisers involved can lose their licenses. Measures are taken to raise awareness and protect potential victims.
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"A wave of mortgage fraud in the Valley has prompted state legislation that would define it as a crime punishable by up to 10 years in prison."
A punishment that harsh is unrealistic and would never pass either. While I agree this type of fraud is getting out of control, so many people are guilty of it that the jails wouldn't be able to hold them all.
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