Mortgage Fraud Crackdown Intensifies
The mortgage industry is facing a severe crackdown on commercial mortgage fraud, with Fannie Mae confirming an ongoing investigation into numerous schemes that may be more widespread than initially thought. The agency has listed financial losses from mortgage fraud as its top risk factor in its latest earnings filing.
Fraudulent Schemes Uncovered
Fannie Mae has discovered instances of multifamily lending transactions where one or more parties engaged in mortgage fraud or possible mortgage fraud. This includes falsifying financial information to obtain larger loans than otherwise possible. These loans were made by private lenders and often sold to Fannie Mae or Freddie Mac.
Industry Players Targeted
Over the past year, the Department of Justice has targeted real estate investors who illegally inflated property valuations. Notable investors, including Boruch Drillman and Aron Puretz, have already pleaded guilty for their roles in mortgage fraud schemes. More indictments and guilty pleas are expected.
Tightening Underwriting Guidelines
Fannie Mae and Freddie Mac have sought to tighten underwriting guidelines in the past year. Freddie Mac has increased inspections at multifamily properties, and both agencies are moving to impose additional rules. Fannie Mae has also stopped doing business with some industry players who have not been charged with wrongdoing.
Stunning Disclosures
Fannie Mae’s latest earnings report reveals that the agency did not independently verify information about borrowers provided by outside lenders. Instead, it relied on representations made by lenders about the loans they were buying. This exposes Fannie Mae to the risk of fraud by misrepresenting facts about a mortgage loan.
Losses from Mortgage Fraud
Fannie Mae has acknowledged suffering losses from mortgage fraud, including institutional fraud perpetrated by counterparties. However, it did not disclose the size of those losses or the companies and properties involved.
Troubles with Multifamily Loans
Separately, Fannie Mae suggested it had troubles with some of its multifamily loans. An unnamed portfolio of about $600 million of adjustable-rate, conventional loans became seriously delinquent in the third quarter.
The Role of Fannie Mae
Fannie Mae is a quasi-governmental institution that helps the mortgage market function, aiming to increase Americans’ access to homeownership and affordable rentals. It does not originate loans but buys loans from private lenders and securitizes them to investors as mortgage-backed securities.
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