With the United States federal regulatory agencies and prosecutors cracking down on commercial mortgage fraud, Fannie Mae and Freddie Mac are preparing to tighten regulations for commercial real estate lenders and brokers.
On Monday, August 5th, The Wall Street Journal reported, citing sources familiar with the matter, that the new rules will require lenders to independently verify the financial information of borrowers of apartment buildings and multi-family properties.
In addition, the new regulations may also require lenders to confirm whether real estate borrowers have enough cash and verify the sources of their funds.
Sources say the new rules may also require lenders to conduct due diligence on the appraisal values of the properties.
The new rules for multi-family property loans could be rolled out as early as this summer and are still in the early stages of discussion, with potential for changes. If implemented, this would signify one of the most significant changes in how Fannie Mae and Freddie Mac monitor loans in recent years.
Currently, under existing regulations, lenders can take a hands-off approach when it comes to borrowers and property finances. They can rely on the data they receive, rather than conducting costly audits or risking losing clients due to excessive red tape.
The background for these proposed new rules comes as federal investigators and real estate brokers have indicated that in the years leading up to the Federal Reserve’s interest rate hikes, prices for apartment buildings and other commercial properties soared to new highs, leading to a surge in loans based on manipulated financial data and valuations.
Since 2022, an increasing number of such fraudulent mortgage schemes have been exposed, with the spike in interest rates leading to significant drops in commercial property prices.
According to court records and sources, federal prosecutors are now collaborating with investigators from the Office of the Inspector General for the Federal Housing Finance Agency, stepping up efforts to prosecute fraudulent activities.
The crackdown has already impacted the multi-family housing market. Previously reported by The Wall Street Journal, Freddie Mac has started requiring borrowers to submit rental receipts, while Fannie Mae has begun reviewing loans to uncover altered financial data.
Stricter lending rules could potentially slow down transaction activities. Industry insiders and investigators suggest that for the rules to be effective, they must address various avenues for potential fraud in the market. Recent real estate scams have involved everything from falsified income statements to fraudulent high-priced property sales.
Fannie Mae and Freddie Mac, being government-sponsored entities, purchase a significant amount of housing loans to maintain the flow of funds in the housing mortgage economy. As of the latest annual filings estimated up to September 2023, these two entities collectively owned or guaranteed around 40% of the $2.2 trillion debt related to multi-family property mortgages.
The Wall Street Journal mentioned that Fannie Mae and Freddie Mac declined to comment, and the Federal Housing Finance Agency, which oversees these entities, also declined to provide comments.