Victims of investment in Otsego

When Richard Tonn saw an ad in 2006 promising riches by investing in real estate, the Minnetonka man thought it would be a good way to nearly double his $27,000-a-year salary as a nursing assistant.

The euphoria of purchasing four homes with no money down disappeared as quickly as the housing boom. Within a year, Tonn found himself in arrears on more than $1 million in mortgages, his credit shot and his homes in foreclosure.

According to Minnetonka police, Tonn was among dozens of investors potentially victimized in an alleged mortgage fraud case involving perhaps as many as 130 homes -- mainly in one Otsego development -- with mortgages totaling more than $40 million.

Tonn and the Otsego investors were not alone. Hundreds of renters also could be left homeless because they paid thousands in fees as part of rent-to-own agreements on homes that are now caught up in foreclosures.

"We didn't do anything wrong," said renter Annette Wilson. "We had so many visions for this house. This was going to be our home."

The Otsego situation is far from isolated, according to state and local authorities.

They say the number of mortgage fraud cases in the state spiked sharply in 2007 as the ripple effects of the sub-prime lending crisis worked its way through the economy.

"We saw a huge exponential increase in mortgage fraud cases," said Emery Adoradio of the Hennepin County attorney's office, which last year handled 20 mortgage fraud cases after only one such case in 2006.

Adoradio and others expect that, locally and nationally, the trend will get worse this year.

"It's big," said Bill Walsh of the Minnesota Department of Commerce, which oversees the real estate industry. "What's new is the sheer volume. We're going to be busy in '08."

The pitch

Linda Clewette of Minneapolis, who has talked with Minnetonka police as part of their investigation, told authorities she saw and responded to the same ad as Tonn.

Clewette was told she qualified to buy six homes even though she makes about $20,000 a year.

In a lawsuit filed last year in Hennepin County District Court against National Investment Group (NIG), United Management Group (UMG), some of their officers and some builders, Clewette claims she was a victim of mortgage fraud in the purchase of the six homes.

Among her charges: that UMG and NIG, working with a dishonest mortgage broker who has since gone out of business, falsified her income on the mortgage applications.

According to the most recent Minnesota secretary of state records, UMG and NIG share the same offices and chief executive officer. Company officials and their attorneys did not return repeated calls seeking comment.

The two firms ran newspaper ads promising $25,000 to $30,000 to investors with no up-front costs as long as their credit score was above 680, according to a search warrant filed by the Minnetonka Police Department, which confiscated NIG records from the company offices Dec. 18.

"I want to know what happened," said Nathaniel Hobbs, Clewette's attorney. "I want to know why my client who made $20,000 ... has just under $2 million in mortgages."

All investors had to do was apply to buy multiple properties, according to police and lawsuits filed by investors. They claim that UMG agreed to find renters with bad credit to live in the homes on a rent-to-own basis; that UMG promised to collect the rent and pay the mortgage, using its own money to make up the difference because the rent was typically about half of the mortgage payment; and that the company said after two years the renters' credit would be good enough to buy the home on their own, and the investors and UMG would split the profit on the homes' appreciation.

Minnetonka police detective Steve Owens said UMG made payments for a few months, then stopped. Investors started getting late payment notices from banks. Then the foreclosures started -- especially in the Otsego area, where residents estimate that as many as 100 homes in the Otsego Preserve development might be in foreclosure.

"They used suckers like me to buy these properties," said Bill Rosival, one of the investors who is holding nearly $1 million in mortgages.

Rosival, of New Prague, was given $5,000 per house from UMG. In exchange, he bought the properties "blind," without ever seeing them. He said the company never asked for a W-2 form or any other proof of income, yet it listed his income on the mortgage application as $8,000 a month.

"That's not even close to what I make... They lied about my income," said Rosival, who does plumbing and heating work.

Owens, one of the investigators in the case, has taken statements from Clewette and others who say their mortgage applications were falsified.

Police and members of the metro-wide Financial Crimes Task Force seized records from UMG and NIG involving more than 130 properties, many of them now in foreclosure, Owens said, and investigators are reviewing all of the mortgage records for irregularities. There are dozens of investors or owners involved, Owens said. "They are from all over. I think anyone who answered the ads was invited to the company."

Owens said he expects to forward his findings to the Hennepin County Attorney's Office for possible criminal charges as early as spring.

Following the Dec. 18 raid in Minnetonka, UMG and NIG left their headquarters.

Last month, United Management Group notified renters that their payments should be sent to their new location on Grove Drive in Maple Grove. The address is for a mail box at the UPS store in a strip mall.

The renters

Last year, about the same time that Minnetonka was launching its police investigation, IndyMac, a California bank, also sued United Management, National Investment and others for breach of contract, negligence and fraud.

In the suit, the bank claims to have uncovered "a consumer credit repair scheme operated by United Management" that cost the bank $1.5 million in fraudulent mortgages. The bank claims the scheme involved builders, appraisers, a mortgage broker and a title company employee.

The dealings of United Management Group, which specialized in the rent-to-own market, not only affected its investors -- it also has touched hundreds of people who bought into the company's promise that it could help them fix their credit.

They signed up for a rent-to-own deal in which they could eventually buy the home in which they were living, with part of their rent going into equity.

As the foreclosure notices hit investors, eviction notices to renters followed. The renters had given UMG thousands of dollars in non-refundable fees to secure their homes. They also stand to lose whatever equity they thought they were building in their homes.

"We were looking to achieve," said Frederick Wilson, one of the UMG renters who was hoping to buy his home next year for about $350,000. "This was going to be our last move."

Instead, Wilson, his wife, Annette; their six children and their 2-month-old grandchild found themselves last week fighting an eviction notice from UMG in Wright County District Court.

The couple won a reprieve when no one from UMG showed up in court. The victory could be short-lived because their home could soon be in foreclosure.

Herón Márquez Estrada • 612-673-4280