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Following a series of scandals and an uptick in falsified financial reporting, Fannie Mae and Freddie Mac are reportedly planning to add more stringent requirements for commercial lenders and brokers.
Under the proposed rules, lenders would have to independently verify multifamily borrowers’ financial information and take specific steps like analyzing properties’ appraised value against their performance and confirming borrowers’ financial sources, The Wall Street Journal reported.
Lenders are currently allowed to accept the information that borrowers provide. The new system — which hasn't been finalized but could be put in place by the end of the summer, according to the WSJ — means lenders will have to clear more hurdles to sell their loans to the agencies, making the process more expensive and time-consuming. As a result, the requirements could slow deal activity.
Federal prosecutors and regulators have reportedly noticed an uptick in falsified financial reporting on loan documents from the mid-2010s through 2021. Faced with rising interest rates, the borrowers who participated in such fraud are now struggling under capital pressures.
But the mortgage giants have also taken additional steps to detect fraud and mitigate risks in recent months.
In April, Freddie Mac updated its Know Your Customer requirements to include additional due diligence for first-time borrowers or those with limited multifamily experience, along with increasing liquidity verification for borrowers.
Freddie Mac is investigating Meridian Capital Group after some of its brokers allegedly fabricated numbers in applications to help clients get larger loans.
Fannie Mae has similarly begun to look over its loan book to purge any falsified records, according to the WSJ.
In February, Fannie Mae notified lenders it won't accept loans from Riverside Abstract and Madison Title after they were linked to two closings by Boruch Drillman that the Department of Justice deemed fraudulent.
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