A housing report from the Arizona Republic. "A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals. Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona's real estate market."

"'Mortgage fraud in the Valley has become so prevalent people think it's a normal business practice,' said Amy Swaney, a mortgage banker and past president of the Arizona Mortgage Lenders Association."

"Under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to the deal is subject to prosecution."

"At a recent Valley real estate meeting with 1,000 agents, mortgage brokers and escrow people, a speaker asked people in the audience if they knew of any cash-back deals in the Valley. All but a handful raised their hands. Many seemed surprised when told such deals are illegal."

"Last November, a cash-back buyer approached Brett Barry of Realty Executives at an open house in north Phoenix. The home had been reduced to $500,000. The potential buyer said he would pay full price but wanted to raise the sales price $40,000 or $50,000 and have the seller write him a check for that extra amount."

"'He wanted the money under the table after the deal closed,' Barry said. 'He said he had a lender with an appraiser who could 'make the deal happen.' Barry knew the deal was bad but was obligated to present it to his clients, who also thought it was too fishy and passed."

"Cash-back deals are so common that a variety of Web sites openly promote them. Postings on the popular craigslist.com include individuals trying to sell homes by offering cash-back deals. 'Anyone in the real estate business who doesn't know these deals are illegal should get out of it,' said Margie O'Campo de Castillo of Arizona Dream Realty. 'These kind of bad deals will hurt everyone in the industry and the housing market.'"

"The Republic investigation found neighborhoods in Gilbert, Queen Creek, Mesa, Laveen and Surprise where speculators bought groups of homes at prices significantly above asking prices and neighborhood comps: a sign regulators consider a strong indicator of cash-back deals."

"The Republic found one new neighborhood where a group of buyers has been selling and reselling homes to one another. According to public records, members of this group paid higher than asking prices using high-interest and adjustable-rate mortgages. They own almost 25 percent of the houses in that neighborhood."

"Tom Ruff is a real estate property record expert. At the Republic's request, he also analyzed the property records that suggest an ongoing cash-back scheme in the new neighborhood studied by the Republic. He called what he saw 'a house of cards' that will soon collapse on the speculators but end up hurting other homeowners more."

"The extent of the damage from such deals is uncertain because the state task force investigation is just starting, but some believe it is Valley-wide. 'The scams have created false appreciation for the Valley's real estate market,' said Diane Drain, a Phoenix real estate attorney who specializes in foreclosure cases."

"Valley housing-market experts now believe home values are inflated anywhere from 10 to 40 percent. The recent drop in home values, about 5 percent in 2006, is part of a market correction. Ironically, cash-back deals that inflate sales prices may have cushioned the fall so far. But as those bad loans come due, they will contribute to the drop."

"Calls about cash-back deals began reaching examiners at the Department of Financial Institutions and Swaney at the Arizona Mortgage Lenders Association in late summer and fall of 2006. The calls were from homeowners, real estate agents and lenders asking if the cash-back deals were legal. The number of calls has increased every month."

"Rotellini of the Arizona Department of Financial Institutions said her agency now receives calls every day on cash-back deals."

"In 2005, loose lending standards helped the mortgage industry post record profits and struggling buyers purchase a record number of homes, (and) also helped speculators and scam artists snap up Valley homes. The hyperdemand created by speculators played a major role in the rapid rise of Valley home values."

"According to mortgage giant Freddie Mac, at least 35 percent of all homes sold in metro Phoenix during 2005 went to speculators and investors. Investors accounted for more than 20 percent of Valley home sales last year."

"As the hot housing market cooled in 2006, business fell for everyone in the real estate industry, including appraisers and real estate agents. Some started looking for new ways to make money. Cash-back deals became a way to keep commissions and fees coming in."

"Less than a decade ago, home buyers had to put at least 10 percent down on a mortgage, show all types of proof of income and even how they earned the money for the down payment. Now, buyers are getting into houses for nothing down and with little proof of income."

"But the many easy-to-get, adjustable-rate loans available also have opened the door for the housing market's downfall. Now, their interest rates and payments are climbing, while their incomes aren't."

"'Adjustable-rate mortgages work for some people who understand them, but there are Valley homeowners who don't and now are on the verge of losing their home,' said Jay Luber, vice president of First Horizon Home Loans of Phoenix."

"Like regular buyers, speculators and housing scam artists are having trouble making their payments as interest rates on their loans rise. And finding a buyer to pay the inflated price they need to cover their loans is getting tougher. The number of homeowners with multiple Valley properties falling into foreclosure also is now rising, according to property records."