Man commits mortgage fraud "to be nice"

Professionals lured into mortgage fraud by hope of legit work - Pittsburgh Tribune-Review

(What's that about the road to hell?)
Monday, March 21, 2011

Ripping off banks for about $20 million before fleeing to Brazil made Bernardo Katz a familiar name in Western Pennsylvania and mortgage industry circles.

Less well known is the Murrysville attorney who helped the Mt. Lebanon fugitive carry out the mortgage fraud schemes.

A federal jury convicted John L. Chaffo Jr., 50, in July on 11 counts of wire fraud and conspiracy. Chaffo transferred thousands of dollars between Katz and other participants in the scheme but earned his standard fees on the deals that ended his career -- and earned him four years and nine months in prison while Katz plays cello in YouTube videos as a fugitive.

Federal officials say it's typical for a few people at the center of a mortgage fraud to make most of the money. Other participants seemingly risk their careers and freedom for the same fees they earn in legitimate mortgage deals. Why? Because, in the mid-2000s, going along with the frauds attracted more legitimate business.

Bradley Dornish, a Baden real estate attorney, said refusing to accommodate questionable deals cost his firm about 20 to 30 closings a month just before the housing bubble burst in 2006 and 2007.

"That happened on a regular basis," he said. "We would tell a mortgage broker that they couldn't do something, and they would go somewhere else."

When a broker left, he or she took the legitimate deals as well as the fraudulent ones. "We were probably at about 80 to 90 closings per month, and then market conditions cut that in half," Dornish said.

Such abuses in the mortgage industry led a Democrat-controlled Congress last year to pass the Dodd-Frank Act.

Now under Republican control, Congress is questioning whether the new Consumer Financial Protection Bureau set up by the act has too much power over banks and other financial institutions.

Elizabeth Warren, the Harvard law professor in charge of setting up the agency, says its priority will be making the paperwork surrounding credit cards, mortgages and other financial services clearer so average people can understand what they're agreeing to when they sign contracts.

Team effort

Federal agents continue to focus on those running scams.

Assistant U.S. Attorney Brendan Conway was one of two federal prosecutors in the Chaffo case and handles prosecutions for the Western Pennsylvania Mortgage Fraud Task Force. He said some prosecutions involved attorneys, appraisers or other professionals who accepted kickbacks from mortgage brokers or others in schemes, but typically they collected standard fees.

On the other hand, they collected fees for mortgages they knew shouldn't go through, and so profited directly from frauds while agreeing to go along with brokers in order to get business, he said.

"The way they made money was by keeping these mortgage brokers happy," he said.

Dornish said brokers were able to exert influence because a congressional change to the Real Estate Settlement Practices Act, which took effect in the early 1990s, allowed them to run mortgages through their own settlement companies instead of the few, largely independent companies that handled closings before then.

Before Congress changed the law, closing attorneys were independent agents hired to ensure correct processing of mortgages. After the change, such lawyers oftens were partners, affiliates or employees of brokers handling mortgages, he said.

For example, court transcripts show Chaffo was prepared to plead no contest at the end of his two-week trial and claim at sentencing that he simply turned a "blind eye" to the mortgage fraud happening around him. During his testimony, Chaffo offered the jury a similar argument, claiming he started circumventing the escrow process because Katz and others tired of waiting for his checks to clear.

"So, I just did it to be nice, to try to be accommodating, trying to help these people out," he said. "I could have been a jerk and just said, 'No, no, you go do it, and then you turn around and do whatever you got to do with it,' making whatever extra work they had to do involved in the whole thing. If they had to wait 10 days, tough luck. I was trying to be a nice guy."

Easily enticed

Ann Fulmer of Stone Mountain, Ga., a former Georgia state prosecutor, started investigating mortgage fraud in 1996 when she noticed speculators "flipping" houses in her Atlanta suburb. She co-founded the Georgia Real Estate Fraud Prevention & Awareness Coalition and became a national expert on the industry.

Fulmer testified about mortgage fraud before the Financial Crisis Inquiry Commission in September. Congress set up the federal panel to investigate causes of the 2008 financial meltdown.

"In a lot of cases, they were promised additional business" for going along with schemes, she said. "While you may not be getting some gigantic windfall for closing the transaction, whoever is organizing these schemes promises that you'll get all their business."

Mortgage professionals became particularly susceptible to this enticement in 2004 and 2005 because the number of new loans started dropping, she said.

The dollar value of loans to purchase or refinance residential properties fell by about 45 percent from a peak near $4 trillion in 2003 to about $2 trillion in 2009, according to data from the Mortgage Bankers Association.

For people whose livelihoods depended on commissions from loan closings, the drop in the market left them scrambling for business, she said. Their desperation made it easier for people to enlist them in frauds, Fulmer said.

Unsung heroes

Joe Bieshelt saw that phenomenon firsthand as an FBI special agent investigating mortgage frauds in Western Pennsylvania for six years.

He said although some people get involved in real estate with the intent to commit fraud, many are professionals who start as legitimate attorneys, appraisers, loan officers and brokers but become criminals for the simplest of reasons -- greed.

"It's a competitive business, and they overlooked some of the shady stuff that was going on (in order) to be competitive and get deals done that no one else could get done," he said.

Bieshelt said many professionals received kickbacks, but even those who didn't knew they were paid to push loans that shouldn't go through.

Bieshelt said some of the people convicted argued that banks encouraged them to commit frauds, but he never found evidence of that. Instead, he found that banks relied on the professionals to stop frauds from occurring -- and the unsung heroes of the government's mortgage fraud investigations are the honest mortgage brokers, appraisers, attorneys and bank employees who refused to participate and pointed investigators toward those schemes.

"Without them there, we would have a hard time getting a good picture about what's going on," he said.

Dornish's firm handles all types of real estate law, so the housing crash five years ago generated legal work that replaced the loss of closings, he said. But attorneys who specialize in closings and other mortgage professionals became vulnerable to coercion by people controlling the mortgage process, he said.

"I don't think it excuses the choices people made, but I think they ended up going down a slippery slope," Dornish said. "It simply was a way to get more business."