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Federal investigators are probing a renewed rash of potential mortgage fraud in the Twin Cities area in response to reports of a large number of unusual real estate transactions in north Minneapolis and elsewhere.
One company being examined has purchased hundreds of properties from southern Anoka County to eastern Dakota County, according to property records.
“The FBI has identified Minnesota as an area significantly affected by mortgage fraud,” said U.S. Attorney Rachel Paulose. She said that a multi-agency task force will be key to breaking “a serious criminal issue.”
Suspicions about illegal “property flipping” were aroused by sales that attracted the attention of North Side neighborhood leaders. Minneapolis City Council President Barbara Johnson brought their concerns to federal, state and county investigators.
“The reason we started looking at these purchases was to see if anything illegal was occurring,” said Sen. Linda Higgins, DFL-Minneapolis.
Some of those properties now are in foreclosure, according to Johnson. That leaves the city with unpaid water bills and delinquent property taxes.
Property flipping involves the purchase and resale of property for a big gain in price. It is often done legally by home rehab specialists whose work justifies a jump in price.
But flipping in the 1990s, especially in north Minneapolis, sometimes was accompanied by fraudulent means of obtaining mortgages, such as inflated appraisals and phony income verifications.
Federal prosecutors charged 20 people on fraud and money laundering charges, with resulting prison terms of up to 57 months. The episode left some areas of the North Side littered with vacant and boarded houses.
Federal agents interviewed Johnson recently about concerns she raised about one company, TJ Waconia.
“What they do is they buy the property at a normal price from a willing seller and they flip it within their own limited liability company and they do it at an inflated price,” Johnson said.
The company often held onto properties for several months, according to property records.
But according to Johnson, many of the properties lacked any evidence of improvements that would justify the gain in prices. Higgins said that many of the resold properties continue to use the same property manager.
City tracks ‘problematic’ sales
Those listed as partners in the company, Jon Helgason of Chisago City and Thomas Balko of Rogers, did not respond to repeated requests for comment. Neither they nor their company has been charged with any wrongdoing.
A website linked to the company said that TJ Waconia was formed because real estate broker Helgason and appraiser Balko saw an upside to real estate beginning in 2000.
The site states that the two prospected for properties on their lunch hours, and own and manage more than 400 units.
The company began to buy Minneapolis housing in mid-2003, peaked in 2005, and appeared to stop last summer. Some of the houses have been resold to out-of-state investors.
“We’ve seen properties we think are problematic and they turn up TJ Waconia,” Johnson said.
Research into the sales was done by the city with help from the nonprofit Family Housing Fund.
A federal mortgage-fraud task force involves representatives of the U.S. attorney’s office, FBI, Internal Revenue Service, Secret Service and postal inspectors.
Johnson also forwarded her concerns to the task force and the Minnesota Department of Commerce, which licenses many of the players in real-estate transactions.
Also taking an increased role in mortgage fraud cases is Hennepin County Attorney Mike Freeman’s office.
“The county attorney is aggressively pursuing mortgage fraud because of its impact on neighborhoods, communities in Minneapolis and its impact on the county due to foreclosures that are an unfortunate consequence of bad loans going into default,” said Emery Adoradio, who heads the county’s complex crimes unit.
Federal attorneys recently prosecuted a multimillion-dollar mortgage fraud case in the Twin Cities uncovered by the IRS and postal inspectors. Four people have pleaded guilty and two more await trial.
And Star Tribune investigations this year showed foreclosures on the rise in the Twin Cities and revealed how unscrupulous mortgage brokers use “straw buyers” to flip houses at inflated prices, leaving behind empty homes, abandoned tenants and ruined credit ratings.
Higgins said that continuing housing and loan scams threaten the efforts to improve North Side conditions.
She said that the recent wave of foreclosures caused by predatory lending tactics has undermined some of the gains made in helping the area recover from the effects of earlier flipping.
She predicted that the expiration of teaser interest rates offered by some lenders will trigger more foreclosures as sharply higher variable rates push payments beyond the reach of borrowers.
“We are once again ground zero for this terrible real estate thing that’s going on,” Higgins said. “We’ve taken a terrible hit.”
Steve Brandt • 612-673-4438 • sbrandt@startribune.com
