Fannie Mae, Freddie Mac to Tighten Rules Amid Fraud Concerns

Fannie Mae and Freddie Mac are planning to implement stricter regulations for commercial property lenders and brokers in response to increasing regulatory scrutiny of fraud in the commercial real estate market, according to sources interviewed by the Wall Street Journal.

Lenders will need to independently verify financial information related to borrowers of apartment complexes and other multifamily properties. They could also face tougher requirements for confirming whether a property borrower has sufficient cash and verifying the source of these funds. Additionally, there may be new rules requiring lenders to conduct due diligence on the appraised value of properties by evaluating their financial performance.

Currently, lenders can take a more hands-off approach, often trusting the financial figures provided by borrowers to avoid costly audits or losing clients. These changes could slow down deal activity in the multifamily industry but are seen as necessary to cover various avenues where fraud can occur. Federal prosecutors and investigators have been increasingly targeting fraudulent mortgage schemes, which have become more apparent since interest rates rose sharply in 2022.

In response, some firms, like Freddie Mac, have started requiring additional documentation such as rent receipts, while others like Fannie Mae are reviewing loans for doctored financials. Fannie and Freddie have also blacklisted firms like Meridian Capital Group due to allegations of falsified financials. Meridian is now working on implementing a risk and control framework. Meanwhile, Berkadia has pulled back on new deals with brokers, opting to focus on direct business and reputable brokers on a case-by-case basis.