Mortgage giants to impose stricter rules to combat fraud
Government-backed mortgage giants Fannie Mae and Freddie Mac are set to tighten lending standards for commercial properties, particularly apartment buildings, in a bid to curb fraud.
The new regulations will require lenders to independently verify financial information from borrowers seeking loans for apartment complexes and other multifamily properties, The Wall Street Journal reported, citing people familiar with the matter.
The proposed changes include stricter guidelines for verifying a borrower’s cash reserves and the sources of their funds. Additionally, lenders may be required to conduct more thorough due diligence on the appraised value of properties, potentially including assessments of a property’s financial performance.
Currently, lenders often rely on the information provided by borrowers without extensive independent verification. The new rules aim to reduce the risk of fraud by ensuring more accurate financial assessments, even if it means adding more bureaucracy and potential costs.
The new rules, expected to be introduced as early as this summer, could significantly alter how these government-backed entities manage their substantial holdings in the multifamily mortgage market. As of September 2023, Fannie and Freddie collectively owned or guaranteed about 40% of the $2.2 trillion in multifamily mortgage debt.
Neither Fannie Mae, Freddie Mac, nor their regulator, the Federal Housing Finance Agency (FHFA), have commented on the specifics of the proposed changes.
The move comes in response to a surge in fraudulent activities, particularly following a period when commercial property prices reached record highs before the Federal Reserve began raising interest rates.
The sharp rise in rates since 2022 has led to a notable decline in commercial property values, exposing various fraudulent schemes, including inflated property values and doctored financial statements.
Federal prosecutors, in collaboration with investigators from the FHFA’s Office of Inspector General, are intensifying efforts to uncover these frauds. The crackdown has already led to significant changes within the industry. For instance, Freddie Mac now requires borrowers to submit rent receipts, while Fannie Mae has started scrutinizing loans for signs of financial manipulation.
The anticipated tighter lending rules could slow down deal-making activities in the multifamily sector. To be effective, industry participants and investigators believe that the rules need to address multiple aspects of the market where fraud can occur.
Read more: Three realtors plead guilty in multifamily mortgage fraud ring
Recent real estate schemes have included falsified income statements and fabricated property sales at inflated prices.
Fannie Mae and Freddie Mac have blacklisted Meridian Capital Group and other brokerage firms after allegations surfaced that brokers had falsified client financials to secure larger loans.
Meridian has since begun to establish a new risk and control framework, which may include periodic audits and board oversight for substantial deals.
Additionally, major commercial property lender Berkadia has scaled back its engagements with brokers. In a statement, Berkadia emphasized that it would “continue to focus on direct business” and selectively work with “reputable brokers for loans on a case-by-case basis.”
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