The crackdown on commercial mortgage fraud is increasing.
Fannie Mae confirmed for the first time an ongoing investigation into a litany of schemes that may be far more in-depth than initially thought. The agency also listed financial losses from mortgage fraud as the top risk factor in its third-quarter earnings report.
“We have discovered instances of multifamily loan transactions where one or more of the parties involved engaged in mortgage fraud or potential mortgage fraud,” Fannie Mae disclosed in its filing with the Securities and Exchange Commission.
The real deal and other media have reported on Fannie and Freddie Mac’s efforts to eliminate fraud in the industry. However, Fannie has not publicly commented on the investigation.
Over the past year, the Justice Department has targeted real estate investors for illegally inflating property valuations. By falsifying financial information, investors were able to obtain larger loans than they would otherwise have received. These loans were made by private lenders and often sold to Fannie Mae or Freddie Mac.
Several notable investors, including Boruch Drillman and Aron Puretz, have already pleaded guilty for their roles in mortgage fraud. More charges and guilty pleas are expected in the future.
Fannie has also stopped doing business with a number of industry players who have not been accused of wrongdoing, including title insurers Riverside Abstract and Madison Title. Freddie Mac recently lifted its ban on making deals with Meridian Capital Group, a major commercial brokerage firm.
The agencies have tried to tighten underwriting guidelines over the past year. Freddie has increased inspections at multifamily properties, and Fannie and Freddie plan to impose additional regulations, according to the Wall Street Journal.
Fannie’s latest earnings report contains some stunning revelations.
The agency acknowledged that it had not independently verified borrower information provided by third-party lenders. Instead, it relied on statements from lenders about the loans they purchased.
“This exposes us to the risk that one or more of the parties involved in a transaction (such as the borrower, the borrower’s attorney, sponsor, seller, broker, appraiser, title inspector, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan,” the agency said in its filing with the SEC.
Fannie also acknowledged that it has suffered losses from mortgage fraud, including “institutional fraud perpetrated by counterparties.” It did not disclose the extent of those losses or the companies and properties involved.
