- New regulations will require lenders to independently verify financials, ensuring borrowers have adequate funds and confirming property values via detailed evaluations.
- The move follows increased efforts by federal regulators and prosecutors to combat commercial mortgage fraud, particularly in the multifamily market.
- Stricter rules may slow down deal activity as lenders and brokers adapt to more rigorous standards, affecting how loans are monitored and processed.
According to WSJ, Fannie Mae (FNMA) and Freddie Mac (FMCC) are set to tighten the rules for commercial property lenders and brokers as part of a broader effort to combat mortgage fraud.
The regulatory shift follows heightened scrutiny from federal agencies aiming to clean up the multitrillion-dollar market.
Proposed Rules, New Processes
Currently, lenders rely on the financial info provided by borrowers, with plenty of incentives to avoid costly audits. These new regulations aim to change this hands-off approach by imposing more rigorous checks and balances, potentially preventing fraudulent activities.
Under the new rules, lenders will need to independently verify borrower financial info for apartment complexes and multifamily properties. This includes ensuring borrowers have adequate cash reserves while verifying the sources of their funds. Lenders will also be required to perform thorough due diligence on property appraisals by evaluating financial performance.
The proposed multifamily rules, which could be implemented as early as this summer, represent significant changes in how Fannie and Freddie oversee these loans. But stricter regulations could also slow down deal activity as lenders and brokers adjust.
Rising Fraud Repercussions
Whatever the case, something needs to be done about all this fraud. Commercial property prices soared in recent years, leading to an explosion of fraudulent loans based on manipulated financials. And as interest rates increased, property prices fell, exposing many of these schemes.
Federal prosecutors and investigators from the FHFA’s Office of Inspector General have ramped up efforts to tackle this issue. Indeed, the crackdown has already impacted the multifamily industry, with Freddie Mac requiring rent receipts from borrowers and Fannie Mae scrutinizing loans for fraud.
Notably, Meridian Capital Group and other brokerage firms have been blacklisted for falsifying client financials. In response, Meridian is overhauling its risk and control framework to ensure greater transparency and accountability.
In Summary
The anticipated tighter lending rules by Fannie Mae and Freddie Mac mark a significant shift in the CRE lending landscape. While these changes aim to curb fraud and bring more integrity to the market, they may also slow down deal-making as the industry adjusts to new regulatory demands.
