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Freddie Mac Tightens Lending Rules In Bid To Detect Fraud

Freddie Mac is rolling out new policies to help detect fraud and mitigate risks, the latest policy adjustments following two high-profile instances of alleged malfeasance in New York. 

Freddie Mac is expanding the scope of property inspections and adding rules to strengthen appraisal independence.

The policy changes, which go into effect Thursday, impact capital underwriting and due diligence around Know Your Customer policies and appraisals. The changes mark the second significant policy shift since Freddie Mac launched an investigation into Meridian Capital Group in November. 

“Freddie Mac remains focused on risk management and works to enhance our processes to better detect and deter fraud and misrepresentation,” Ian Ouwerkerk, Freddie Mac's senior vice president of multifamily underwriting and credit, said in a statement. “We take these issues seriously, and these enhancements are just the latest step in our effort to manage risk and improve our execution.”

The policy shifts are reflected in the government-sponsored entity’s new Multifamily Seller/Servicer Guide, to be released Thursday.

They boost the number of unit inspections and the lease audit sample size for property inspections, along with requiring additional documentation to confirm the accuracy of reported tenant rent payments. 

The updated Know Your Customer requirements include additional due diligence for first-time borrowers or those with limited multifamily experience. The rules also call for enhanced liquidity verification for borrowers. 

Freddie Mac is also strengthening its appraisal review process and appraiser independence requirements to safeguard the “objectivity and impartiality of appraisers.”

The lender will also update policies that limit business “with certain title companies when applicable” for its multifamily lending arm. 

The policy changes follow a November move from Freddie Mac to require that loan documentation come directly from borrowers and not from brokers involved in the transaction. Fannie Mae, the other federally backed purchaser of multifamily mortgages, made a similar move around the same time when it introduced a pre-review requirement for all agency-backed loans involving brokers.

Freddie Mac is concerned that the position of the market in the real estate cycle could drive an increase in fraud attempts. The policy changes followed a November report that Freddie Mac was investigating Meridian Capital for allegedly fabricating numbers in applications to help clients get larger loans. 

The ongoing investigation caused Freddie Mac and Fannie Mae to halt any transactions with Meridian. Brokers at the New York-based firm, one of the country’s largest brokers of commercial mortgages, have been blacklisted by Freddie Mac even if they left Meridian for other firms, according to a Wall Street Journal report. Meridian brokers have reportedly faced increased scrutiny amid the near-collapse of New York Community Bank, which used Meridian to find borrowers.  

No specific title companies are referenced in the new Freddie Mac rules, but Fannie Mae notified lenders in February that it would no longer accept loans from Riverside Abstract and Madison Title. 

The firms are linked to two deals with New York investor Boruch Drillman, who pleaded guilty in December to a years-long conspiracy to secure $165M in loans using fictitious documents. Neither firm was charged in the case. 

Freddie Mac and Fannie Mae are government-sponsored entities tasked with providing liquidity to the mortgage market. They have been overseen by the Federal Housing Finance Agency since the 2008 financial crisis

Freddie Mac purchased more than $49B in multifamily loans in 2023, supporting 423,177 affordable rental units, while Fannie Mae closed the year with more than $52B in multifamily financing. The entities typically package the loans they acquire into securities and sell them to investors in the private market. 

Both agencies are capped at up to $70B each in multifamily loan purchases for 2024, not including mortgages they acquire for workforce housing.