Multifamily Loan Fraud Scheme Costs JLL $18M

JLL lost millions in the second quarter after falling victim to multifamily fraud.

Fraudulent investors conspired to get a $74M Fannie Mae loan for a Cincinnati apartment, according to the DOJ, resulting in an $18M loss to JLL in Q2, CoStar reported.

"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 most recent earnings call. "Both we and Fannie Mae were victims of fraud on this loan." 

Frederick Shulman, Chaim "Eli" Puretz and Moshe "Mark" Silber each pleaded guilty on Aug. 1 to one count of conspiracy to commit wire fraud affecting a financial institution.

Using a stolen identity and an inflated purchase and sale contract, the trio of investors obtained a $74M loan from JLL and Fannie Mae to buy the property in 2019. The property was purchased for $70M, but the investors stated the price was $96M. Closings were done for both prices. 

The $18M loss JLL took on the property during Q2 includes expenses tied to buying back the loan in August. The loan is in default and has a receiver. JLL hopes to stabilize the property before it is sold, Brennan said on the call.

Brennan said JLL is monitoring other, smaller loans for fraud that don't have a resolution yet but are more stabilized in occupancy than the Cincinnati property and account for a small number in its portfolio.

"Holistically, if you look at — including the recently repurchased loan — loans with known or potential fraud by the borrower, [they] represent less than half of 1% of our overall Fannie and Freddie portfolio," Brennan said. 

In an effort to crack down on multifamily fraud, Freddie Mac and Fannie Mae are tightening financial reporting requirements for lenders and brokers. 

If the new rules go into effect, lenders would have to take extra steps to verify financial information from multifamily borrowers, such as confirming financial sources and combing through a property's appraised value. The prolonged process would be more expensive and could slow deal activity. 

Currently, lenders don't have to verify the financial statements borrowers give them. The updated measures are expected to launch by the end of the summer.