Continued: New twist on mortgage fraud: Did rent money 'prop it all up'?

Federal officials are investigating a Hastings couple in a new twist on mortgage fraud -- converting apartment buildings in Rochester, Sauk Rapids and Spicer into condominiums and then allegedly using phony buyers and bogus bank records to secure more than $5.5 million in financing.

It is, one expert said, one of the more unusual cases in Minnesota, one hot spot for mortgage fraud in the nation.

"I think it's unique in using renters' monies to prop it all up. Usually, mortgage fraud just flips the property and tries to make money on the resale," said Craig Siiro, who investigates fraud in Minnesota but is not involved with this case.

The leaders of the alleged scheme, James and Teresa Hoffman, are accused by the FBI of selling dozens of condos "at substantial profit" to a handful of buyers who never intended to live there and never really had to pay for them.

Instead, the couple supplied the buyers' downpayments, propped up their bank accounts and falsified their mortgage applications, the FBI alleges. They then used rent from the condos to cover the straw buyers' mortgage payments, according to a search warrant affidavit filed in federal court.

But the Hoffmans allegedly started using those funds for other purposes. The mortgages went into default, leaving the straw buyers holding the bag, according to the FBI.

"To put the straw buyers at risk is just a dangerous thing," Siiro said.

Judge issues injunction

Several of the condos sit empty now, the carpet ripped out and their future uncertain. U.S. District Judge David Doty issued a temporary injunction in June to keep the Hoffmans and their associates from engaging in other fraud or getting rid of assets. Doty also appointed a receiver to take control of the Hoffmans' businesses.

The Hoffmans have not been charged with a crime. James Hoffman, who recently answered the door at his Hastings home, declined to comment. "I would very much like to talk, but I need to check with my lawyer first," he said.

Hoffman's attorney, Peter Wold, said his client believes he has done nothing illegal. "Jim Hoffman has been threatened with this investigation for many, many, many months," Wold said. "And he is anxious to defend himself with good faith if they do charge him."

An FBI spokesman also would not comment specifically on this case, saying it is an ongoing investigation. But the Hoffman investigation appears to be part of a crackdown on mortgage fraud here and across the country.

Officials with the FBI, the U.S. Attorney's Office, the Internal Revenue Service and the Postal Inspection Service have formed a mortgage fraud working group. Several large cases have recently resulted in convictions in federal court in Minnesota. FBI officials say dozens of other investigations are underway.

According to the FBI, Minnesota is one of 10 "mortgage fraud hot spots" in the United States.

"Mortgage fraud is a big deal," said Special Agent Paul McCabe, an FBI spokesman. "And there are lots of different victims, from banks and mortgage companies to homeowners and neighborhoods."

Empty condos

A block north of St. Marys Hospital in Rochester, in a neighborhood of mature trees and 100-year-old homes, 11 1980s-style townhouses sit vacant. Some of the windows have been papered over.

Two years ago, the Hoffmans and their companies bought these units for $625,000 to convert them into condos. According to an affidavit filed by the FBI, the Hoffmans then sold the 11 units for $123,500 each.

FBI agents later interviewed the three buyers, who said they were solicited by James Hoffman, according to the affidavit. Hoffman said he and others would arrange the financing, that he and others would place renters in the properties and make the mortgage payments and that Hoffman would "pay the straw buyers an additional amount beyond mortgage payment," the affidavit states.

Hoffman directed the buyers to Minnesota One Mortgage, which is no longer in business. Chad Wegscheider and Patrick Dols acted as brokers for the buyers and helped prepare false loan applications, the FBI said in the affidavit.

Dols did not respond to a telephone message seeking comment. Wegscheider, whose home telephone has been disconnected, did not respond to a note left at his White Bear Lake home. A Mortgage One for sale sign stands in the front yard.

According to the affidavit, James and Teresa Hoffman gave the buyers money for the down payment in the lobby of the title company on the day of closing. Hoffman set up a company to manage the Rochester property and collect rents. The rent would go to the straw buyer to pay the mortgage.

But, starting in March 2008, the condo buyers told the FBI, the monthly payments stopped, although the Hoffmans still collected rents.

According to the affidavit, much the same thing happened with a 24-unit apartment building in Sauk Rapids, a 16-unit apartment building in Spicer and a single-family home in Willmar.

The Hoffmans did the same thing with their own home, according to the affidavit.

In May 2006, their home was subject to foreclosure and sheriff's sale, the affidavit says. The Hoffmans owed more than $900,000.

Still in their home

But in August 2006, a single mother and waitress bought the home. According to the affidavit, the Hoffmans recruited her to act as the buyer and helped her to obtain two fraudulent mortgages totaling $1.2 million. The Hoffmans then took $219,000 of that for their own use, the FBI says. The Hoffmans allegedly agreed to cover the $11,800 monthly mortgage payments and pay the woman an additional $2,000 a month. They still live in the home, the affidavit says.

The FBI does not identify any of the straw buyers. Rochester property records show the townhouse properties there now are owned by Paul Jeannotte. But Jeannotte would not say when he bought them. "On the advice of my attorney, I really can't say anything," he said.

In all, the affidavit says, "ill-gotten monies earned by the defendants through their real estate fraud scheme are, to date, in excess of $5.5 million."

McCabe, the FBI spokesman, said he could not comment on where the case stands, or when or if the Hoffmans, Wegscheider or Dols might be charged.

But Siiro, the mortgage fraud investigator, said that while most people who participate in mortgage fraud never seem to think they'll get caught, it was inevitable that this case would capture the federal government's attention.

"If you think about most fraud, you can only hide this for so long," he said.

James Walsh • 612-673-7428