'Straw buyer' deals fuel tidal wave of foreclosures

She was 22 and tired of exotic dancing for a living. So Irene Thomas bet her future on real estate, hoping that becoming a landlord would be her first step toward exiting the stage.

With the help of Universal Mortgage Inc., a brokerage company in Brooklyn Park, Thomas signed the papers to buy a house early last year. And she kept signing. And signing.

In 90 days, with none of her money down, Thomas had $2.4 million in debt and 10 houses in her name, most in north Minneapolis. Nine belonged to officials of Universal, the same company that handled the transactions for her.

Less than 18 months later, Thomas was losing every property to foreclosure after the monthly payments weren't made. Her credit ruined, she now says she was duped by a group of real estate insiders who sold houses at inflated prices.

The practice is so commonplace that real estate experts say it is helping fuel the nation's foreclosure epidemic, which is destabilizing neighborhoods as home after home is lost to banks and other lenders.

In places such as north Minneapolis, hit by 600 foreclosures already this year, investors have used real estate deals as get-rich-quick schemes, leaving empty homes, abandoned tenants and wrecked credit ratings in their wake.

Property records show Universal has been at the center of a web of transactions where a small group of investors, including several Universal employees, bought rental properties and quickly resold many at above-market prices. At least 27 houses linked to the firm have landed in foreclosure, according to property records.

Earlier this year, a mortgage lender filed a federal lawsuit against Universal, accusing two employees of using fraudulent documents to make money from another real estate deal. And two other people who bought houses through Universal are accusing the company of taking advantage of their real estate inexperience to sell them overpriced rental properties.

Nine mortgages processed by Universal and signed by Thomas incorrectly indicated that Thomas would live in the homes. In other cases, documents for two other Universal clients, both unemployed, stated they held jobs.

"All along I feel like they were just screwing me over and they knew what they were doing," Thomas said.

She said a state Department of Commerce investigator subpoenaed her early this year to talk about Universal and some of its employees. The department would not confirm the existence of any investigation.

Universal owner Donald Walthall declined to comment for this story. Marlon Pratt, who worked at Universal, said he owned five houses that Thomas bought and doesn't know what led to the foreclosures.

A lot of people get into the business of being landlords, Pratt said. "And they don't have no idea the work that comes behind it."

A growing part of the market

Real estate insiders have seen cases like Thomas' before -- so many that there's a name for it.

"This is called a straw buyer," said Kristin Wilson, a senior loan officer with Summit Mortgage Corp. in Bloomington.

Thomas' 10 mortgage applications wouldn't have been accepted by one lender, she said. "Which is why they would have submitted one to this investor, one to this investor, one to this investor ... because then everybody else is unaware of it. And if it was all done within a fairly short period of time, it would be easier to do," Wilson said.

The Commerce Department, which regulates the real estate industry, said straw buyer schemes are growing in scope and sophistication.

"This is hard to pull off by yourself; it usually takes an appraiser, a mortgage guy, a title company and, in some cases, the buyers are even part of the scheme," said Commissioner Glenn Wilson.

He said the department is adding three real estate investigators to its staff of seven and referring cases for criminal prosecution. But it's too late to stop the foreclosures that are already taking a toll.

"There are unsuspecting buyers who are victims here because they were led to believe they could afford the American dream and they can't," said Stephanie Gruver, an insurance agent who sits on north Minneapolis' Webber-Camden Neighborhood Organization board. "But the other victim here is the community."

Thomas' story

Thomas acknowledges that her name alone is on the mortgages and that she bears the financial responsibility for the foreclosures.

But none of it would have happened, she said, without Cleveland Fields, a man she says she met outside a nightclub in downtown Minneapolis. Thomas had just turned 21.

They had been friends for about a year when he suggested buying a house using her good credit and his cash, she said. He introduced her to Universal, she said, and when she first walked in the door of the firm, she was surprised when a loan officer said: "So you're getting 10 properties."

Fields eventually convinced her that 10 properties would be 10 times more profitable, she said, so she started signing.

Thomas said she didn't know then that four of the houses came from Walthall, Universal's owner, and five came from Pratt. Records show both men had purchased most of the houses in the previous year and sold them to Thomas for an average 30 percent more than they bought them, even though real estate values in those areas were dropping.

Thomas said a Universal employee told her she had a few weeks to make the purchases. Fields put money in her account, telling her she needed money for closings, she said. And things seemed to be going fine at first. Then she got a startling call about foreclosures. And the calls kept coming.

Thomas knew that each primary mortgage she signed included language that she was going to live in the house. All the paperwork was filled out when she signed it, she said.

Fields had told her they would split $10,000 back for every mortgage closing, she said, but only about $20,000 of that materialized.

"All I know is I was not ever supposed to talk about this. He said once people found out how much money I would make, then they would start hating on me and I should not tell anybody," Thomas said. "And then once I found out everything was bad, I still didn't tell anybody because I was so embarrassed."

She said Fields, who had agreed to manage the properties, collect rents and pay the mortgages, kept the paperwork and keys. She said she has seen only two of the houses.

In an interview, Fields said it was just a real estate investment that went bad. It was Thomas' idea, he said, to buy the 10 houses and she asked him to manage them. Though he said he's friends with some people at Universal, he said he didn't introduce Thomas to the firm and had nothing to do with the purchases.

He said Thomas is trying to shift blame. "Nobody did nothing wrong or did nobody wrong," he said. "She was inexperienced and trying to get into real estate, and I was inexperienced at trying to help her to manage the properties."

The lawsuit

Apart from Thomas' foreclosures, there are at least an additional 17 in the past year that had been sold or owned by Pratt, Walthall or former Universal employee Andre Bellfield.

Bellfield lost nine of his own houses to foreclosure, but he managed to sell two houses in north Minneapolis to Dametrice Walker.

Walker claims in a federal court affidavit that Bellfield and Pratt told him at a basketball court that he could make "a lot of money in real estate and drive nice cars, just like them." But Walker hadn't been employed "for some time" and Bellfield knew it, the affidavit said.

The lender in those cases, Homestead Mortgage, alleges in a lawsuit that Universal, Bellfield and Pratt engaged in fraud and racketeering by getting an inflated appraisal, falsifying a document saying Walker was employed at a construction firm and putting money into Walker's bank account so he could qualify for a loan.

Pratt declined to comment on the suit but said in a deposition filed in court that he knew little of the transactions between Walker and Bellfield, who was fired by Universal for his handling of the case. Pratt said in a court filing that his signature on Walker's employment form was forged.

Pratt's attorney filed a cross-claim saying any liability is Bellfield's. Universal claims in court that if there was wrongdoing it was by Pratt and Bellfield and that Homestead didn't do enough to protect itself.

Efforts to reach Walker and Bellfield were unsuccessful.

The Smiths

Lawrence Smith and his fiancée Kimberly Cordell, who've lost three homes to foreclosure, soon will lose six more. All were bought with Universal's help, Smith said.

"It was doomed to fail from the very beginning," he said.

Smith thought he was getting homes ready to rent. Some, however, had substantial problems, including the three houses he brought from Pratt. His high mortgage payments meant he had to charge high rents, so he had problems getting tenants. In little more than a year, he spent all of the $100,000 from his father's estate and his mother's savings.

His mother's name was used to buy three of the houses. The mortgage applications for those indicate that his mother was employed as an insurance agency claims representative. Smith denies that his mother, who is 66, ever had such a job. He doesn't know how that information got on the form. Two of the forms indicate that Pratt had prepared them.

Through his attorney, Pratt declined to comment further.

"There's good guys and there's bad guys," Smith said. "There's people who are ignorant of what's going on and there's sharks."

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