The FBI and state of Minnesota authorities are investigating mortgage fraud in the state, and while federal and state authorities would not refer to any builders by name, alleged wrongdoing by home builder Parish Marketing and Development Corp. of Eagan, Minn., was recently reported in local newspaper articles.

Bill Walsh, a spokesperson for the Minnesota Department of Commerce, said the Parish case could very well be the largest case of mortgage fraud in the state's history.

The U.S. Attorney's Office in Minnesota, which has taken the lead in the case, said that the alleged mortgage fraud involves nearly 200 properties, $100 million in mortgage proceeds, and $50 million in losses.

Cynthia Geis, county auditor for Scott County, an area roughly 30 minutes south of Minneapolis that was the focus of recent newspaper reports, said the FBI was in her office at least three times during the last six months looking over records on Parish Marketing. She said the government was trying to uncover why certain purchases by home buyers were never recorded with the county.

According to an FBI report, combating mortgage fraud has become a federal priority because mortgage lending and the housing market have such a significant effect on the nation's economy. The FBI investigates mortgage fraud in two distinct areas: "fraud for housing" and "fraud for profit." Fraud for housing is when the borrower lies about his or her income or employment situation to obtain a loan. Fraud for profit is sometimes referred to as "industry insider fraud," and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders, as is the case in allegations against Parish.

For home buyers Carrie and Corey Karau, it all started when builder Michael Parish told them he would help them move into one of his new homes. The couple had credit problems but were anxious to move out of their 1,100-square-foot home in nearby Belle Plaine for a more spacious, 3,200-square-foot home in New Market, Minn. Parish offered a "contract for deed," a method of selling a home in which the buyer agrees to purchase the property, pays an agreed upon amount, and gets possession, but the seller keeps the title until a certain number of payments have been made and any other contract terms have been satisfied. Under the arrangement the Karaus made with Parish, they would make a monthly payment of $2,187 and after three years, assuming they had a good payment record, would move into a conventional, fixed-rate mortgage.

"We have five boys, so we really needed the space, plus we never suspected anything since my husband had done insulation work for Parish for over 10 years and Parish was well known in our area," said Carrie Karau.

The Karaus moved into their new home in December 2005, and everything was fine until the early part of this past summer when they started receiving refinancing sales pitches in the mail addressed to a Melissa Smith, as well as phone calls for Smith asking if she wanted to refinance.

Later that summer, according to Karau, a person claiming to represent a bank drove up to the house in a minivan looking to serve papers to Melissa Smith. Finally, two months later, the Karaus were served foreclosure papers for their house in Smith's name.

Karau confronted Parish about the notice and he said his "investors" had taken care of everything and to disregard the notice. At this point, Karau was suspicious, so she checked with the county and it showed that a Melissa Smith had taken a second mortgage out on the Karau house. According to Karau, Parish never recorded the sale in the Karaus' name. There was no formal record of the Karaus ever buying the home, and under further investigation there was no record of the mortgage company ever receiving close to $40,000 in payments, plus a $5,000 down payment.

Shocked, Karau took her case to several lawyers, all of whom told her that the best she and her husband could hope for was an IOU from Parish. "They told us any money Parish had left would go to the bank," she said, adding that she and her husband can stay in the new house until January.

As of late Tuesday night, Karau said neither federal nor state authorities have been able to identify Melissa Smith.

However, the federal government released two plea agreements connected to the Parish case. One was a U.S. Bank loan officer, who admitted to falsifying loan documents; the other was a closing agent and licensed notary, who admitted to falsifying numerous closing documents.

Several phone calls to Ryan Pacyga, Parish's attorney, were not returned by Wednesday afternoon. And federal and state officials would not comment regarding an ongoing investigation.

What's clear is that many more home buyers may have been harmed. According to the Star Tribune, more than 30 homes built by Parish in New Prague and New Market have fallen into foreclosure.

At press time, Parish had not been charged with a crime.

Learn more about markets featured in this article: Minneapolis-St. Paul, MN.