Fannie Mae Admits Financial Losses Amid Ongoing Mortgage Fraud Investigation

Following an uptick in ​​falsified financial reporting, Fannie Mae is on the hunt for commercial mortgage fraud, acknowledging for the first time it is looking into widespread wrongdoing by some industry players.

The mortgage giant is amid an ongoing investigation into fraudulent loan schemes, and it named financial losses from mortgage fraud as its biggest risk factor as part of its Q3 earnings filing, The Real Deal reported. 

“We have discovered instances of multifamily lending transactions in which one or more of the parties involved engaged in mortgage fraud or possible mortgage fraud, and we continue to investigate additional multifamily lending transactions in which we suspect fraud may have occurred,” the agency’s most recent filing with the Securities and Exchange Commission states.

An increase in falsified financial reporting on loan documents from the mid-2010s through 2021 has been on the radar of federal prosecutors and regulators for months, though this marks the first time Fannie Mae has publicly acknowledged its investigation.

Investors who falsified financial information were able to qualify for larger loans from private lenders before those loans were sold to Fannie Mae or Freddie Mac. Those borrowers are now struggling under capital pressures as they face rising interest rates. 

Investors such as Aron Puretz and Boruch Drillman have already pleaded guilty to participating in mortgage fraud with more indictments still expected, TRD reported. 

JLL was hit with an $18M loss in Q2 after Chaim “Eli” Puretz, Frederick Shulman and Moshe “Mark” Silber allegedly took part in a conspiracy to secure a $74M Fannie Mae loan for a Cincinnati apartment building. The trio pleaded guilty to conspiracy to commit wire fraud affecting a financial institution in August.

"We had originated and sold that loan to Fannie Mae in the first half of 2019," JLL Chief Financial Officer Karen Brennan said during the company's Q2 earnings call. "Both we and Fannie Mae were victims of fraud on this loan." 

Fannie has also cut ties with some firms, including title insurers Riverside Abstract and Madison Title. Freddie Mac had banned deals with Meridian Capital Group, but lifted it last month “after a thorough review process,” an agency spokesperson said.

Fannie Mae didn’t disclose the amount of its losses from mortgage fraud. But as part of its press release announcing $4B in net income and other Q3 results, Fannie Mae wrote that it anticipates decreases in the multifamily property values it projected, reflecting “uncertainty relating to property values and the ongoing investigation of multifamily lending transactions with suspected fraud.”

Fannie Mae noted it used information on borrowers from outside lenders rather than verifying that information independently. Over the last year, Fannie Mae and Freddie Mac have worked to make underwriting guidelines more stringent and are pushing lenders to independently verify the financial information of multifamily borrowers and analyze the appraised value of properties.

Not doing so “exposes us to the risk that one or more of the parties involved in a transaction (such as the borrower, borrower’s attorney, sponsor, seller, broker, appraiser, property inspector, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan,” the agency’s SEC filing states.

In other Q3 results, Fannie Mae said one $600M portfolio of multifamily loans had become seriously delinquent, increasing from a 0.46% delinquency rate at the end of 2023 to 0.56% as of Sept. 30. About one-third of those loans — those that are 60 or more days past due — are in the senior housing sector.