FBI wary of new mortgage scams
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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
Becky said
am September 14 2007 @ 6:51 pm
What about the families that rented property from these people…what are they supposed to do. How are they suppose to find housing and what about their security deposits?
admin said
am September 15 2007 @ 9:11 am
Perhaps you will find a response in the next post.
Jim said
am September 22 2007 @ 8:12 pm
Admin: Which post were you referring to?
Becky:
Unfortunately for the tenants, their security deposits are very unlikely to be returned. When the lender forecloses on a given house, the lease the tenant had with the owner/landlord is no longer valid. The tenant can sue the owners to recover it but that would take time and money. Even if they won, collecting would be another issue.
As far as finding housing… They are on their own to find another place to live/rent. If a tenant is on “Section 8″ or assistance of some sort, then that organization will generally try to assist them in finding another place to go.
Your question of “what are they supposed to do?”
I recommend to tenants to not pay their rent BUT, the safe thing to do is place the rent funds into an escrow account until they know that the lender has completed the foreclosure. If the owner corrects the default, then the tenant has the funds in place to remain in good standing with the landlord.
This part is very crucial to a tenant: If a lender forecloses on a property, they will be contacted either by a Realtor that has been hired to list the house or the lender themselves. Either way, MOST lenders do understand the tenants are also losing in the situation and most of the time will offer what is known as “Cash for Keys.” Both the lender and tenant agree to a move out date. The tenants agree to vacate by that date and leave the house empty and have all trash removed. The lender will do a quick walk-thru on that date and hand the tenant a Cashiers Check (usually between $500 and $1,000) in exchange for the keys. Some lenders don’t tell the tenants about it in hopes they won’t have to pay it. So I always make sure the tenants are aware of such a program.
It’s a sad situation for nearly everyone involved. The owners generally have lots of other issues that contributed to losing the house, the lender loses a substantial amount of money and the City has to deal with the property not being kept up (and taxes too).
Criminal acts can come up with possible vandalism, “squatting,” drug activities, etc.
And finally the tenants. There are no winners in these situations.
-jim