A report from the Arizona Republic. "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 day after The Arizona Republic's special investigation into cash-back mortgage deals, Sen. Jay Tibshraeny of Chandler introduced a bill that would make mortgage fraud a felony."

"'Mortgage fraud hurts everyone,' said Tibshraeny, who has been working on the legislation for months. 'Buyer, beware of a deal that seems too good. The strings your Realtor or mortgage broker pull may be illegal.'"

"Valley real estate investor and marketing executive Francine Hardaway said: 'Thank God somebody finally blew the whistle on this. As an investor, I see it all over the place.'"

"Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, is leading a new mortgage fraud task force made up of state and federal agencies. Rotellini said her agency was deluged with calls Monday from people reporting cash-back deals and other potential mortgage fraud."

"Valley appraiser Dennis McMillen said that mortgage fraud is an issue in the housing market but that it's not always due to inflated appraisals. In some cases, he said, 'real estate agents and mortgage brokers are withholding the cash-back agreements from the contract, thus the appraiser and title company does not know of these agreements.'"

"Valley attorney Michael Manning represents some groups that were sold 'bad loans' as part of the cash-back scheme. 'Public awareness coupled with a little proactiveness by local prosecutors will help stem the practice and help prevent a meltdown in the market,' he said."

"(Realtor) Don Matheson of Scottsdale said: 'This is a very big problem and very damaging to our real estate market. We need to catch these people and put them in jail.'"

"Several readers were alerted to the schemes when they saw homes sit unsold for months and their prices reduced. Then, as the housing market was slowing even more, those homes sold for tens of thousands of dollars more than the previous listed price. That is the No. 1 warning sign for cash-back deals, regulators say."

"'People have started to lose a little money in the Valley's real estate market, but maybe when major money is being lost, lenders will get serious and do something to stop it,' (said) Margie O'Campo de Castillo, Arizona Dream Realty."

"'Cash-back deals are a big problem. Our members started hollering about them a couple of months ago. Lenders are funding loans for more than properties are worth. Its inflating home prices. It is really scary. We need regulatory agencies to crack down on it. And we need consumers to know they shouldn't do it,' (said) Michelle Lind, General counsel for the Arizona Realtors Association."

"'If somebody wanted to stretch the value on a home, probably not difficult to find an appraiser out there willing do it. Cash-back sales are hurting comps in neighborhoods. Somebody overpays for a house with a cash back deal, and then somebody else comes in and wants to buy the house next door. The last buyer is making a major decision based on inaccurate market information,' (said) Jay Luber, VP of First Horizon Home Loans of Phoenix."

"The proposal by Sen. Tibshraeny would spell out in statute that it is illegal to deliberately misrepresent financial or other material information when buying a home and obtaining a mortgage. A single offense could result in a 2 1/2 year prison term. And those who are involved in multiple schemes could face five years behind bars."

"Potentially more significant, Rotellini said the law spells out that home buyers involved in these kinds of frauds are equally culpable — and can be equally punished. 'It will help to cover the gamut of players,' she said."

"Rotellini said her agency has broad powers over both mortgage bankers and mortgage brokers. But she said she has no authority over home buyers who in many cases may be the primary perpetrators of the fraud."

"'In fact the buyer in these cash-back schemes is the primary perpetrator,' Rotellini said. 'They're the one that's getting the loan that's been misrepresenting the value of the property or other aspects of it.'"

"'None of this was a problem when the real estate market was rising,' said Tibshraeny. But he said there are many areas where loans on homes are far more than their worth, a situation he said that could cause the collapse of real estate values throughout entire neighborhoods."