Two men behind one of the largest mortgage fraud schemes to hit the Twin Cities area pleaded guilty to mail fraud Thursday in federal court.

Thomas J. Balko and Jonathan E. Helgason, co-owners of TJ Waconia, pleaded guilty to a three-year scheme that involved 162 properties and $35 million in mortgages.

Most of those properties were in north Minneapolis where a city lawsuit charges that the men and their firm laid waste to three neighborhoods, leaving blocks dotted with vacant, deteriorating housing. They turned 141 of the properties over to a court-appointed receiver this week.

Balko, 37, of Rogers, and Helgason, 45, of Chisago City, entered their pleas to U.S. District Judge Joan Ericksen under a deal negotiated between their attorneys and the U.S. attorney's office, represented by prosecutor Joseph Dixon.

"I'm delighted," said City Council President Barbara Johnson, who conveyed initial neighborhood suspicions about the firm to the FBI.

"I look forward to gathering some victim-impact statements for sentencing from the community," she said.

Helgason faces a recommended sentence of up to about 12 1/2 years, while Balko faces a sentence of up to about 10 years. The sentence will depend on the court's determination of how much money was lost and how many people the pair victimized. The government contends the scheme cost more than 50 victims as much as $20 million, figures the pair dispute. Helgason's proposed sentence is greater because he was a licensed real estate agent, but he's fighting to have that factor excluded from consideration.

The government estimates the firm will be fined between $10.8 million and $21.6 million, but restitution to victims takes precedence. Those are believed to be investors who bought properties in the scheme, some of whom have sued TJ Waconia and the lenders.

Neighborhood spotted scheme

The scheme was initially uncovered by neighborhood association staffers in the Folwell and Webber-Camden areas. "It's sort of a vindication of our ability to recognize fraud when we see it," said Roberta Englund, neighborhood staff chief. She said lenders in the scheme also need to be held accountable for making bad loans.

Here's how the scheme worked: From 2005 to 2007, the pair worked through a variety of companies to buy properties and shortly resell them to investors for $20,000 to $60,000 more. Most investors didn't even inspect the properties, the plea agreements said.

Investors were told they were lending their credit to the company for a payment of $2,500 upon closing and added payments in two years when the firm would repurchase the property. The investors were straw buyers because they held the property in name only, and the firm fronted them money for the purchases. The firm made payments to investors so they could pay the mortgages on the properties. Ultimately the scheme collapsed, leaving the investors owing mortgages that exceeded the property value. Most of the properties are in foreclosure.

Further prosecution possible

The plea agreements do not require Balko and Helgason to cooperate in further investigations by the FBI, postal inspectors or tax investigators. But they hint at another possible avenue of prosecution by alleging that the men worked with others to present fraudulent loan applications to lenders that overstated investor incomes.

Neither man offered any comment on the scheme during their court appearance. "They're eager to make good on this situation," Allan Kaplan, Balko's attorney, said after the hearing.

Steven Meshbesher, who represented Helgason and the firm, noted that the defendants complied with a city request to turn over the north Minneapolis properties as part of the city lawsuit.

"This was not his intention,'' Meshbesher said of his client. "Things developed that he did not intend to do. He feels bad about it.''

Steve Brandt • 612-673-4438