Left unchecked, cash back at closing deals cost homeowners and lenders millions of dollars, and according to an in depth article in yesterday's The Arizona Republic, could erode confidence and values in Arizona's real estate market. From yesterday's online edition of the Republic:

A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals. The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated. Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy.

While the extent of the fraud is unclear, an Arizona Republic investigation into these cash-back deals found organized groups of speculators have bought multiple homes this way, leaving whole neighborhoods with inflated values. Add to these the individual deals done by amateurs who hear others talk about the easy money they made from cash-back sales.

State investigators and real estate industry leaders want more enforcement and greater public awareness to stop the spread of cash-back deals before the damage mounts.

As The Republic correctly points out, under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to a deal involving inflated valuations is subject to prosecution. Need proof? As I have mentioned before, all you have to do is look at a 1003 (that's the code name for the Uniform Residential Loan Application) that every homebuyer must sign when applying for a home loan. The 1003, which is authorized by Title 18 of the United States Code, Section 1001, is very clear in this regard. To paraphrase, you cannot lie on a loan application or any other document related to a transaction. When a buyer, appraiser, real estate agent, loan officer, or another party provides a false statement of a property's value on a 1003 or any other document, they have lied, which means they have also broken the law.

More from The Republic:

Felecia Rotellini is a Notre Dame law school graduate and former assistant attorney general who is now superintendent of the Arizona Department of Financial Institutions. Her agency regulates mortgage lenders, state banks and credit unions in the state. Alarmed by what she was hearing from lenders and real estate agents, she has just pulled together state and federal regulators to form an Arizona mortgage fraud task force.

"People need to understand these cash-back deals are illegal and stop," she said. "We are going after mortgage fraud."

As I told Catherine Reagor, The Republic writer who penned the article, Arizona was like a housing gold rush for speculators from California, Florida and Texas a few years ago, but home prices stopped climbing, and speculators got greedy. Now the cash back scam is going to make the savings and loan crisis of the 1980s look like a soft landing.

If you suspect or are aware of cash back deals involving Arizona home sales, contact Catherine Reagor, who is looking for additional help with The Republic's continuing coverage of this story. Reagor can be reached via email by writing to catherine.reagor at arizonarepublic dot com.