This WSJ report is not ‘just a one-off. ‘ Serious fraud in the commercial sector is evident as seen in residential housing, best memorialized in the “docudrama-comedy “The Great Short.
When lending is brisk, underwriters “miss” the “red flags”.
When business slows, the fraud(s) are exposed.
There are other posts in the Journal’s Investigates series that have been crowded out of my schedule due to the NAR antics.
Real-Estate Meltdown Strains Even the Safest Office Bonds
WSJ: AAA Commercial Bonds Defaults Double in 2024
Fraud Allegations Against Rental Owners at New High (July 2024)
Note: Loan brokers rarely originate commercial loans, leaving institutional lenders (commercial banks” as the obvious culprits.
WSJ: Fannie/Freddie to Tighten Rules For Multi-family Lending
by Matt Carter August 05, 2024
The WSJ reports that concerns about fraud will lead to stricter rules for commercial property lenders who provide funding for apartment buildings that are backstopped by mortgage giants Fannie and Freddie.
The Journal reported that Fannie and Freddie’s federal regulator rules—will require lenders who want to sell multi-family loans to the mortgage giants to do more due diligence on borrowers and their properties—as soon as the end of summer, citing anonymous sources “familiar with the plans.”
The WSJ reports that Fannie and Freddie (as of June 30) own or guarantee $927 billion in multi-family loans, representing about 40% of the market.
Multi-Family Business: Small but Growing
Freddie Mac’s multi-family mortgage portfolio is growing faster than its single-family guarantee business—source: Freddie Mac.
Multi-family mortgages make up only about 13 % of Freddie’s $3.5 trillion mortgage portfolio, for example, but they grew by 5 % during the second quarter of 2024, to $447 billion. Fannie’s multi-family portfolio totaled $480 billion as of June 30.
Much of the risk associated with Fannie and Freddie’s multi-family loan portfolios has been transferred to private insurers, and so far, the loans are performing well. The serious delinquency rate on Fannie Mae’s multi-family portfolio was flat at 0.44 % in Q1 and Q2 2024.
However, the Journal reported that rising interest rates have exposed many fraudulent commercial mortgage schemes based on doctored financial reports and valuations.
Federal prosecutors have been working with the FHFA’s Office of Inspector General to uncover the extent of the problem.
The WSJ reported that the drafted rules may require lenders who do business with Fannie and Freddie to conduct more thorough evaluations of the financial performance and valuations of properties that serve as collateral.
Although they’ve been in government conservatorship for two decades, Fannie and Freddie are profitable and continue to build their net worths.
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