Task force wages war on mortgage fraud

Western Pennsylvania is tied for second in number of federal prosecutions filed

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Colleen Walters didn't know that the house next to hers in Dormont was the subject of mortgage fraud allegations, or that the owner was a fugitive accused of fleeing the country with nearly $200,000 in gold coins.

She knew all too much, though, about bamboo.

Under the ownership of now-indicted Frank S. Guzik Jr., formerly of Murrysville, contractors planted a bit of the oriental evergreen in the backyard of 1231 McNeilly Road. After Mr. Guzik abandoned the house, the bamboo took over and invaded Ms. Walters' property, defying her use of lawn mowers, weed trimmer, herbicide, rock salt and even gasoline.

"Nothing worked," she said.

Mr. Guzik, meanwhile, enticed five investors to lend him money backed by the house. He ended up with more than $270,000, and they ended up with overlapping mortgages on a home that Allegheny County says is worth $50,000. His indictment for that and other transactions said that he then bought $199,837 in untraceable gold coins before disappearing.

Mr. Guzik is one of 111 people prosecuted for mortgage fraud in the Western District of U.S. District Court in recent years, most through the work of an 11-agency Mortgage Fraud Task Force. So far, 95 people have been convicted, with 14 cases pending and two fugitives -- Bernardo Katz, who bought up swathes of Beechview, and Mr. Guzik.

The result has been, by some measures, one of the most successful assaults on mortgage fraud in the country. Leaders of the task force are now talking about applying the approach to other scam-plagued markets, while continuing to weed the once-overgrown mortgage jungle widely blamed for the global financial wilt.

"Nothing is more vital to [Americans] than their homes, their neighborhoods, their banking relationships -- all of which were put at risk by an unscrupulous band of bandits who, in the eyes of some, rolled the dice with the entire financial structure of the country," said U.S. Attorney David J. Hickton.

"We have had a high impact on this type of activity in this area," said Sybil A. Smith, acting special agent in charge of the local Internal Revenue Service criminal investigation office. "We have smothered it, and we intend to continue to do so."

Tracking spaghetti

It all started with a series of searches through the trash of a McKees Rocks man.

Unlicensed appraiser Kenneth C. Cowden's trash bags, snatched from the curb by FBI Agent Joseph M. Beishelt, contained printouts of e-mails and other documents. The papers hinted at the existence of a web of people who made money by wildly exaggerating the worth of properties, borrowing from banks based on the fictional values, and splitting the proceeds among themselves.

More complex versions involved fake leases and worthless second mortgages ginned up to fool banks into thinking their loans were low-risk. The typical result was a home or commercial building drowned in debt, foisted on an unwitting third party or left for the banks to foreclose, at a steep loss.

Not permitted under state law to appraise property, Mr. Cowden nonetheless had vouched for values totaling $320 million, sometimes following brokers' written instruction to exaggerate features, downplay defects and fabricate prior sales. He became the ultimate informant. Reflecting his cooperation, Mr. Cowden was sentenced to 45 months probation, including nine months in a halfway house, and ordered to pay $959,363 in restitution.

"The [investigation] just completely mushroomed from there," said Assistant U.S. Attorney Brendan T. Conway, lead prosecutor for the task force. Since no one agency had the manpower to follow every lead, the U.S. Attorney's Office reached out to a host of law enforcement organizations and created a task force.

What they discovered was a web of relationships that looked "almost like a plate of spaghetti, how everybody seems to be interlinked," said Mr. Conway. Members of a community of wayward investors, speculators, brokers, appraisers and attorneys -- with the occasional compromised banker or underwriter thrown in -- mixed and matched their talents on deal after deal.

Tracking the spaghetti trails became a team effort.

The FBI led searches. The U.S. Secret Service analyzed the data on computers seized from brokers. The IRS tracked transactions and compared apparent income with reported earnings. State Department of Banking and Department of State offices shared audits of, and complaints against, brokers and appraisers. Agents divvied up the suspects and then shared notes.

The fact that mortgage fraud almost always involves conspirators -- it takes a buyer, a seller, an appraiser, a broker and an attorney to close a land deal -- played to law enforcement's advantage.

"When you have multiple co-conspirators, you work from the outside and get the smaller people to flip on the bigger suspects," said Julie Halferty, associate division counsel for the FBI in Pittsburgh, who previously headed a mortgage fraud unit in Arizona.

In 2009, Western Pennsylvania tied for second in federal mortgage fraud prosecutions filed, behind only South Florida, according to Syracuse University's Transactional Records Access Clearinghouse, which analyzes Department of Justice data.

Pittsburgh wasn't the scene of an outsized amount of fraud, FBI statistics suggest. The bureau identified nearly 10 times more suspicious mortgage transactions in the Phoenix area, for example, than in the Pittsburgh area. But tellingly, Western Pennsylvania saw around the same number of mortgage fraud prosecutions as did Phoenix, suggesting a more thorough weeding of the lending garden.

"It really astounds me, how many cases they did here," said Ms. Halferty.

Fraudulent neighbors

Mr. Conway said he has identified around 1,000 local properties involved in the frauds, and visited neighborhoods to see the effects. "All you have to do," he said, "is imagine living next to one."

The brick home at 232 Zara St. in Knoxville is worth $31,500, according to county records, but deeds show that Wayne Fumea, a 63-year-old Blairsville man, bought it for $63,000 in 2006. That reported sales price was used to justify a $50,400 mortgage from CIT Group, backed by an appraisal by Richard Lawrence Veazey. Mr. Veazey was indicted in June and accused of inflating values, and has pleaded not guilty.

According to the 2008 indictment of Mr. Fumea, 232 Zara was one of five properties that he bought in collaboration with a group led by property dealer Kelly Fields, 38, who is now serving more than eight years in prison for fraud. Ms. Fields' team helped him to exaggerate his creditworthiness, inflate the properties' values, fabricate tenants and persuade banks to lend.

Mr. Fumea is scheduled for a March 16 trial. His attorney, Donna McClelland, would say only that he "was not in the business of being a mortgage broker, nor an attorney, nor a real estate appraiser," but was rather just a working man who moonlighted as a landlord and has now lost his properties.

After Mr. Fumea's purchase, 232 Zara was occupied for a time by a group of people that neighbors called "the hillbillies." They stripped the pipes and siding from their home, apparently for sale as scrap. They began to use the backyard as a bathroom, according to neighbors.

They eventually left, and the house now stands empty, boarded up by the city of Pittsburgh, marred by graffiti tags.

"Look at that," said Kenny Wood, a retired Port Authority maintenance man whose well-kept home of 32 years sits across the street from 232 Zara. "I'm concerned about how long it's going to continue to be an eyesore ... which I know is bringing down the value in the whole area."

The loan didn't work out for CIT Group, either. Claiming it was owed more than $64,000, it foreclosed in 2008, and the property sold to investors for just $9,900. Burdened by many such transactions, the century-old lender went bankrupt in late 2009.

Banks took a bath on some big, fraudulent mortgages, too.

Take 521 Chestnut Road in Edgeworth. The four-bedroom, two-bath house, on nearly 18,000 square feet of land, was one of eight Sewickley and Fox Chapel area properties used to perpetrate six-figure mortgage fraud, according to a 2009 indictment of Sewickley resident Denise Bonfilio.

Records show that two people, including Ms. Bonfilio's former housemate Deborah Kitay, bought 521 Chestnut for $349,500 in 2006. According to the indictment, Ms. Bonfilio then arranged a series of mortgages backed by false documentation.

In 2008, Deutsche Bank foreclosed on 521 Chestnut, reporting it was owed $830,135, and selling the house for $274,900 -- a loss of $555,235.

Ms. Bonfilio is scheduled for trial in February. Ms. Kitay, 53, pleaded guilty on Dec. 2 to fraud and failure to file a tax return. She is set to be sentenced in April.

Moving on

The Mortgage Fraud Task Force continues to investigate and bring new cases. Last month, the U.S. Attorney's Office indicted appraiser Howard Reck of Regent Square-based Citizen's Appraisal Services and accused him of exaggerating property values to justify inflated loans.

The pace, though, has slowed, in part because banks have tightened up lending requirements. That has key task force players looking for other areas in which they could find fraud.

Among potential targets are foreclosure rescue scammers that prey upon troubled borrowers.

Nationally, con artists are contacting homeowners who face foreclosure, promising to save their homes -- for an up-front fee of between $200 and $5,000. They cash the homeowner's check, then disappear.

Other, more sophisticated "rescuers" engineer complex schemes to capture ownership of foreclosure-threatened houses, cheap, then sell them at a profit, according to the Secret Service.

The task force hasn't yet indicted anyone related to a foreclosure rescue scam.

Mr. Hickton said a next step may be cloning the task force and attacking health care fraud, an area of growing concern to the Department of Justice. Other federal law enforcement leaders are considering a multi-agency push to stop reverse mortgage fraud schemes, or investment cons that target peoples' retirement nest eggs.

Long after the task force has moved on, though, the damage from the infestation of fraud into the mortgage market will remain.

In 2006, Tamara Whitehead of McKeesport agreed to let her then-husband, his "mentor" Robert Jones, a lawyer named Robert Danenberg and others put her name on four mortgages. She reluctantly signed because the rental houses she was buying were occupied by tenants with federal Section 8 housing vouchers, and because the involvement of an attorney comforted her.

When she realized, too late, that some of the mortgages exceeded three times the assessed value of the properties, she "just couldn't believe it." The excess proceeds were nowhere to be found. Her husband told her, "We got scammed." They soon broke up, and he has since died.

Mr. Danenberg is serving a two-year sentence for fraud. Mr. Jones is on probation for three years. Other associates of theirs are either under indictment, awaiting sentencing or serving time.

For her part, Ms. Whitehead, 33 and a mother of three, has four properties that declined rapidly and are now uninhabitable; they are so devoid of value that lenders have declined to take them via foreclosure. Employed as a social worker, she has little time or money to put into them, and has been hit with property tax bills and fines for things like uncut grass.

Her credit rating can no longer support even a car loan.

"Here it is four years later," she said, "and I'm still dealing with it."

Rich Lord: rlord@post-gazette.com or 412-263-1542.


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