Real Estate Fraud is Alive and Well in Minnesota

Real estate fraud is alive and well  — a recent prosecution results in 75-month sentence for Minnesota mortgage broker; more scams continue to get uncovered

Some significant mortgage and real estate fraud schemes have been recently prosecuted in Minnesota.   Michael Hadalla, CEO and co-owner of Enzo Mortgage Group, was sentenced to 75 months in prison and ordered to pay $800,000 in restitution and a fine of $10,000.  (http://minnesota.cbslocal.com/tag/enzo-mortgage-group/)  Prosecutions involving the Enzo Mortgage firm have previously resulted in the conviction of other individuals involved in the scams. ( http://www.hennepinattorney.org/NewsPress/tabid/391/EntryId/56/Three-defendants-sentenced-to-serious-time-for-mortgage-fraud-racketeering.aspx)

Another mortgage company (Mortgage Planners, Inc.), alleged to be involved in a “sophisticated” fraud scheme found itself in the eye of the storm in 2011 when a collaborative investigation / prosecution team involving the Commissioner of Commerce, HUD, and the Hennepin County Attorney’s Office initiated charges of racketeering in an alleged fraud scheme involving more than 60 properties.  (http://minnesota.publicradio.org/display/web/2011/06/22/mortgage-fraud-charges/)  This scheme is alleged to have involved “straw buyers” purchasing properties at foreclosure sale, who never intended to be the owners or occupants of the property.

In a June 2011 press release, the U.S. Department of Justice indicated more than 30 individuals in MN were prosecuted for mortgage fraud or related crimes, and that number had reached more than a dozen by the middle of 2011.  http://www.justice.gov/usao/mn/press/jun047.pdf

The June U.S. Department of Justice 2011 press release details the prosecution and conviction of several notable mortgage fraud schemes that have taken place in Minnesota, including the infamous scandal involving the Cloud 9 Sky Flats.  The carnage left by that scandal continues to unfold, with business owners involved in a mortgage brokerage and title company having ties to the Cloud 9 development entering guilty pleas as recently as last month. (http://www.bizjournals.com/twincities/news/2012/01/19/two-more-guilty-cloud-9-fraud-trooien.html)

In March, the author of this blog entry, Thomsen Nybeck shareholder Brad Boyd, will join representatives of the FBI and the Department of Commerce in presenting a seminar to real estate agents and brokers addressing some of the current fraud issues in today’s real estate marketplace.  It is important for real estate professionals (real estate agents, brokers, mortgage brokers, title companies, attorneys) and consumers alike to recognize that we have not emerged from a fraud-ridden marketplace, fraud continues to occur.

While many people mistakenly believe real estate fraud is part of a bygone era, that’s simply untrue.  FBI statistics report that FBI mortgage fraud pending investigations totaled 3129 in FY 2010, up 12% from FY 2009 and up 90 percent from FY 2008 (source: FBI.gov). Minnesota ranks in the top 3 states for mortgage fraud cases nationally, based on dollar amount (as of Q3 2011 based on a MortgageDaily.com report).

Mortgage fraud hurts consumers and taxpayers by taking money away from banks.  While banks are not always a sympathetic victim, what hurts the banks in turn hurts consumers.  Lending standards go from nearly unregulated to hyper-regulated, making financing more difficult to obtain for legitimate and qualified buyers.  In the end, many of the economic woes of a damaged real estate marketplace and devalued housing market can be directly or indirectly linked to fraud scams and real estate values which were simply a mirage, propped up by illicit transactions.

In a market filled with foreclosure and short sale transactions, fraud hasn’t disappeared, it’s simply found a new format, and we all need to remain alert to the new trends.  Everyone can play a role in being alert to avoiding the misrepresentations, omissions, or false information that form the basis of a mortgage fraud scheme.

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This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck.  Brad’s practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals, and is a frequent speaker for real estate continuing education throughout the state of Minnesota.

http://www.startribune.com/local/north/127963973.html

Investigators auditing loan docs force buy-backs

There are a growing number of businesses that are focusing tremendous efforts on finding misrepresentations, fraud, or egregious mistakes in loan files that resulted in bad mortgages, ultimately leading to high levels of borrower default and foreclosure.  Some of these entities have proven successful on behalf of loan investors (such as those who hold mortgage-backed securities, a familiar dinner table term) in forcing the banks who originated such loans to buy them back.

In a Wall Street Journal Online article posted yesterday (View full article here: http://online.wsj.com/article/SB10001424052748703559504575631110278708250.html?mod=rss_whats_news_us_business), some extraordinary stories are revealed.  Unfortunately high levels of fraud which would have seemed almost inconceivable in the mortgage business ten years ago, were obviously sufficiently common in recent years that the trend of such “extreme” examples became common enough to derail the bedrock business of mortgage and real estate.  The Wall Street Journal article cites some of the scenarios where “no doc” loans where borrowers did not have to verify their income through tax records or financial statements led to catastrophe.

Here are a couple “interesting” stories quoted from the WSJ article.  “One borrower whose loan was scrutinized claimed to be a shoe salesman earning $35,000 a month. A regional sales manager who cited earnings of $250,000 a year actually made $47,000 as a clerk for the same company.” (click here to link to full WSJ article).

Fortunately, some of the banks that engaged in such utter lack of judgment are being held accountable for some of their actions (buying back the loans), but with the current high rates of foreclosure, borrowers struggling to repay their existing debts (even in “traditional” loans) and lending severely hamstrung, the tales of this crisis have not yet been fully written.

If you’re interested in this issue, follow my updates on Twitter @BrokerageAtty.

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This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

Restitution Ordered in Minnesota Mortgage Fraud Case

It was reported today by the Minneapolis Star Tribune that Jonathan Helgason and Thomas Balko, former owners of a now-inactive corporation known as TJ Waconia, Inc., were ordered this morning to pay restitution of $11.7 million following their guilty pleas in a fraud scheme which the government says involved $35 million in mortgages.  The two men allegedly bear much of the blame for the large number of foreclosures in north Minneapolis.

Restitution is the obligation of a criminal defendant convicted of a crime to pay money to the person or persons financially harmed by the alleged crime.  The men are obligated to pay this money in addition to their prison terms.

Entry by Matt Drewes.  Matt is a shareholder at Thomsen & Nybeck, P.A. and head of the firm’s Community Association Representation Group and Co-chairs the firm’s Construction Defect Litigation Group.  He practices primarily in the areas of real estate litigation, townhome and condominium law, construction litigation, debtor/creditor law, insurance litigation and employment law.