In 2010, the “Wall Street Reform Act” was passed to reduce real estate lending and property frauds; which has largely been successful.
Apparently, there will need to be new (more) legislation to cover commercial real estate fraud.
“Me Thinks, doth protest est too much.”
Expect the banking lobbyists to oppose any such reforms with bags of cash for both sides of the aisle. Enjoy the post!
Fraud Allegations Against Multi-Fam Rental Owners at New High
by Marian McPherson July 08, 2024
Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency are teaming up with federal prosecutors to crack down on a rising number of multi–family landlords who submit inflated financial statements to obtain larger loans.
Regulators, prosecutors, and commercial brokers told The Wall Street Journal that rising interest rates and default rates, paired with weakening property values, have exposed the severity of the issue, which centers around the underwriting process for commercial mortgages.
Lenders make lending decisions based on a T-12 form outlining a building’s annual income and expenses. The article explained that landlords can exclude one-time expenses and disclose them as footnotes.
However, lenders are inconsistent about properly auditing, leaving the door open for unscrupulous landlords to inflate their finances.
The WSJ said the number of real estate fraud investigations isn’t “publicly” available.
Still, at least five landlords in Cincinnati, Hartford, Connecticut, and Little Rock, Arkansas, have pleaded guilty to federal fraud charges since January.
In those cases, landlords allegedly altered their T-12 form to exaggerate their building income or faked property sales to get larger loans.
Another case involving Michigan-based landlord ROCO Real Estate and JP Morgan Chase made headlines in 2023 when ROCO Real Estate co-CEO Tyler Ross inflated his Tallahassee, Florida, rental apartment complex’s profits by 117% from $296,000 to $644,000. The Cherit Group defaulted on the Tallahassee property in late 2022.
Editor’s Update: According to the DOJ, Tyler Ross ‘A California real estate executive, pleaded guilty yesterday (Sept 29, 2023) to engaging in an extensive multi-year conspiracy to falsify financial statements.
The buyer, NYC-based Cherit Group, used JP Morgan Chase to underwrite a loan to purchase the Tallahassee property and 54 other ROCO properties across the U.S. for $418 million based on the falsified T-12 statements Ross provided.
Freddie Mac now requires landlords to provide (physical) rent receipts and advises lenders to inspect (physical walk-through) rental units to ensure they’re occupied.
