Fannie Mae building. The rules, if enacted, would bring big changes to how multifamily loans are monitored. Photo: Maansi Srivastava for WSJ
Fannie Mae and Freddie Mac are preparing to impose stricter rules for commercial-property lenders and brokers, following a budding regulatory crackdown on fraud in the multitrillion-dollar market.
Lenders would have to independently verify financial information related to borrowers for apartment complexes and other multifamily properties, according to people familiar with the preliminary plans.
Additionally, lenders could face tougher requirements for confirming whether a property borrower has adequate cash and verifying their source of funds.
The new rules might also require lenders to complete due diligence on the appraised value of a property, by evaluating its financial performance, for example, these people said.
Under the current system, lenders are able to take a more hands-off approach when it comes to borrower and property financials. They face incentives to trust the figures they are sent, rather than pursuing expensive audits or risking losing clients to too much red tape.
Fannie and Freddie declined to comment. The Federal Housing Finance Agency, which regulates the two entities, also declined to comment.
Fannie and Freddie, which are backed by the government, purchase and securitize a huge portion of loans in the U.S. residential and commercial mortgage market. The two entities together owned or guaranteed roughly 40% of the $2.2 trillion in multifamily mortgage debt as of September 2023, according to estimates from their latest annual filings.
The new multifamily rules, which could be rolled out as early as this summer, are in early stages and could still change, these people said. If they are enacted, they would represent some of the biggest recent changes in the way Fannie and Freddie monitor these loans.
Apartment-building and other commercial-property prices surged to new highs in the years before the Federal Reserve started to raise interest rates, leading to a flurry of loans based on doctored financials and valuations, federal investigators and real-estate brokers say.
More of these fraudulent mortgage schemes have been exposed since 2022, when sharply higher interest rates led to significant declines in commercial-property prices.
Now, federal prosecutors are increasing their efforts to root out fraud, often working together with investigators at the FHFA’s Office of Inspector General, according to court records and people familiar with the matter.
The crackdown is already rippling through the multifamily industry. Freddie has started to require borrowers to submit rent receipts, while Fannie has begun to go through loans to look for doctored financials, The Wall Street Journal previously reported.
Tighter lending rules could slow deal activity. To be effective, according to industry participants and investigators, rules would have to cover a number of different avenues of the market where fraud can occur. The real-estate schemes that recently came to light involved everything from fudged income statements to faked property sales at inflated prices.
Fannie and Freddie effectively blacklisted Meridian Capital Group, along with other brokerage firms, after allegations that its brokers falsified client financials to get bigger loans.
Meridian has since sought to build and implement a risk and control framework, largely from scratch, that could require periodic backtests and board approval for deals of a certain size.
One major commercial-property lender, Berkadia, recently pulled back on new deals with brokers, people familiar with the matter said.
In a statement, Berkadia said it would “continue to focus on direct business” and use “reputable brokers for loans on a case-by-case basis.”
Write to Gina Heeb at gina.heeb@wsj.com