Sept. 9: Mortgage fraud infiltrates suburbs

Carrie and Corey Karau thought they were buying their dream house 20 months ago when they and their five children moved to a bucolic neighborhood in New Market, Minn.

But $30,000 in payments later, the couple discovered the house they thought they owned under a "contract for deed" from home builder Parish Marketing and Development Corp. of Eagan had been sold to someone else and was in foreclosure. The house they planned to live in for the rest of their lives was about to be repossessed. "How do you explain something like this to your kids?" asked Carrie Karau. "That's the hardest part."

The Karaus are among dozens of people in the Twin Cities' southern suburbs caught in what state regulators believe is the largest case of mortgage fraud in Minnesota history.

The alleged scheme involves at least one established home builder, Parish Marketing, and more than a dozen real estate professionals who allegedly inflated property values and falsified documents, according to sources close to the investigation.

Investigators suspect Parish Marketing used so-called straw buyers, often relatives, to purchase multiple homes at inflated prices. The scheme unraveled as the housing market slowed, new buyers could not be found and houses ended up in foreclosure.

That this alleged fraud has occurred in small, distant suburbs such as New Prague and New Market, far from the urban neighborhoods that have been the traditional target of such schemes, comes as no surprise to market observers. "The lights may be too bright in cities like Minneapolis, so they are moving out to rural areas and two-tier cities," said Merle Sharick, vice president of Mortgage Asset Research Institute, a firm in Reston, Va., that verifies parties in mortgage transactions. "You can get away with more in those places."

Bill Walsh, a spokesman for the state department of commerce, acknowledged that state regulators are investigating other large cases of mortgage fraud in several other Twin Cities suburbs, which he declined to identify for fear of tipping off the perpetrators.

The fact that the alleged scheme involves a reputable home builder makes it all the more unsettling. Parish Marketing was founded in 1980 and has built more than 2,000 homes in the Twin Cities' southern suburbs. Some of the houses were sold at prices in excess of $1 million.

Michael Alan Parish, 62, who runs the company with his wife, Ardith Ann Parish, 61, declined to comment and referred questions to their attorney, Ryan Pacyga.

Pacyga said the homebuilder built too many upscale homes at a time when demand was in decline. The situation forced the company to "seek nontraditional methods to move the properties," said Pacyga, who declined to be more specific. "This is a case that the real estate world will talk about for a long time," he said.

More than 30 houses built by Parish Marketing in New Prague and New Market have fallen into foreclosure, according to county officials. And more are expected.

In New Prague (population: 6,400), it's hard to go anywhere without bumping into someone who knows a person or business affected by the alleged mortgage fraud.

At a housing development called Prague Estates, where houses are priced at $300,000 to $500,000, rows of Parish homes sit vacant or unfinished. Some are surrounded by knee-high weeds. Several contractors who worked for Parish said they are owed more than $25,000 each. The New Prague Times is running three pages of foreclosure notices a week, twice the usual number.

The FBI came knocking

Residents are stung by revelations that their city, which straddles the border of Scott and Le Sueur counties, may have been the center of a massive conspiracy to defraud home buyers and lenders. In recent weeks, agents from the FBI have showed up at people's doorsteps, asking questions.

"A lot of people who were living right in the middle of all this said, 'No, that's not happening here,'" said Kristin Guerrette, who moved to Prague Estates in 2003. "Now, they're in shock."

The government said the alleged mortgage fraud involves nearly 200 properties, $100 million in mortgage proceeds and as much as $50 million in losses. Some straw buyers bought more than 50 properties, according to court records. Real estate records show one investor, Christopher Troup, the Parishes' son-in-law, was involved in at least 29 transactions with Parish Marketing. Troup could not be located for comment.

State investigators suspect these straw buyers bought houses from Parish at inflated prices, often using falsified loan documents. It appears they recruited mortgage brokers, loan officers, appraisers, even notary publics, to arrange fraudulent loans. "It's similar to other cases we've investigated, where everyone at the table knew what was going on," Walsh said.

Two families said they bought houses from Parish under contract-for-deeds, only to discover later that the houses were sold to someone else and their payments had vanished. Shannon and Will Whitecotton said they made a $5,000 down payment on a home in Prague Estates as well as about $45,000 in monthly payments.

However, the contract-for-deed was never registered at the county, which meant there was no record they even lived in the home, Shannon Whitecotton said. When they went to pay off the contract-for-deed, the Whitecottons were told they had no claim to the house. An eviction notice arrived about two weeks later. "We were dumbfounded," she said.

The Whitecottons said they later discovered that title to the home at 1125 Horseshoe Lane in New Prague was under the name Bonnie Bauer, who in property records is listed on at least 23 transactions with Parish.

"I think [Mike Parish] was double dipping," Shannon Whitecotton said. "He was pocketing the monthly payments, selling the homes and then sitting back and playing banker."

Bauer, Ardith Parish's sister, according to Pacyga, could not be located for comment.

Inflated prices

Some residents said they suspected fraud because Parish homes often sold for more than other homes in the area.

Diane Khwice, a Chaska real estate broker hired by representatives of several banks to value about 15 homes built by Parish in New Prague, said the homes had been sold at $50,000 to $100,000 higher than comparable-sized homes in the area. "They were all overpriced," she said.

This week federal regulators handed down two indictments related to the scheme. Ramiz Yousef Saadeh, a U.S. Bank loan officer, admitted to providing falsified verifications of deposits for buyers, to make them appear qualified for loans, when the money was coming from homebuilder's funds. Pacyga later identified Parish as the homebuilder.

Kristopher Robbins, a closing agent and licensed notary public, admitted he closed scores of property transactions "in which individuals executed loan documentation in the names of other persons who were actually purchasing the properties."

Both men pleaded guilty and agreed to cooperate with the investigation.

In New Prague, residents are concerned the rash of foreclosures will drive down housing prices across the city. Some residents want city officials to hold a town hall meeting. "There aren't enough people in this town to fill all those vacant houses," Guerrette said. "So we've got to find a way to bring people here. Soon."

Staff writers Dan Browning and Glenn Howatt contributed to this report. Chris Serres • 612-673-4308

Chris Serres • cserres@startribune.com