Tighter Fannie, Freddie Underwriting Unnerves Commercial Real Estate

Any rule changes would be facilitated by the Federal Housing Finance Agency (FHFA), which regulates both Fannie and Freddie. The FHFA and Fannie Mae did not return requests for comment. Freddie Mac declined to comment.

Neil Shapiro, partner in the real estate practice at New York City law firm Herrick Feinstein, said that while combating commercial mortgage fraud is important, the multifamily borrower clients he represents have concerns around the creation of additional barriers to agency loans. Shapiro estimated that the tighter rules will add around 45 to 90 days of closing time for deals during the first six to nine months following the rules being put in place — at a time of already elongated deal closing timelines, and a time of distress for many multi-
family loans due to higher interest rates.

“In the short term and maybe even in the intermediate term, it seems highly likely that these changes will result in fewer loans while they’re working out the process and everyone is getting used to this, so the timing couldn’t be worse in terms of impact,” Shapiro said. “Borrowers will be suffering the consequences of having to learn the new process, and it’s going to be more highly scrutinized.”

Shapiro noted that the eventual scope of the new rules will determine the significance of their impact. He said potential new procedures and processes could also add weeks of extra time to a closing timelines, with agency lenders bulking up their own due diligence groups to tackle the changes. 

Matan Kurman, head of originations at S3 Capital, the private credit platform of New York-based CRE investment firm Spruce Capital, said that while he supports the goal of GSEs tightening underwriting standards, there is concern this will make closing deals more challenging in the near term. Kurman said the rules, depending how far they go, may put larger multifamily owners at an advantage over smaller players since they have more back office staff to address the new paperwork.  

“I think probably for the first year or more  is going to create a lot of noise, and it is going to take financing out of the system that will stress values,” Kurman said. “I think the idea is good, but it is the implementation that I’m very very nervous about.”

Kurman noted that Spruce Properties, a subsidiary that owns 5,000 apartment units, relies heavily on agency loans, with all of its properties financed by 10-year fixed debt from Fannie or Freddie.  

Both Fannie and Freddie have taken their own steps to address fraud within agency-backed multifamily loans over the course of 2024. The moves came on the heels of both GSEs clamping down on Meridian Capital Group when a Freddie-backed loan negotiated by the brokerage firm was called into question in November 2023. 

Meridian was effectively blacklisted by both GSEs, with Freddie Mac issuing a guide update this past April requiring additional documentation for lease audits to confirm tenant rental payments. Fannie Mae has also been inspecting loans looking for doctored financials in recent months, according to the Wall Street Journal. 

The microscope on Meridian prompted the brokerage to hire Melissa Martinez from CoreLogic in June as the company’s first chief risk officer. The move was aimed largely at bolstering Meridian’s compliance and risk control procedures across its CRE finance, investment sales and retail leasing units, the brokerage said at the time.  

The barriers placed on Meridian give other brokers and agency lenders the opportunity to try to attract new business. Berkadia, for example, has recently begun to focus on more direct loans and using brokers on a more selective basis from “reputable” firms on a “case-by-case basis,” the firm said in a statement. 

“I think that most borrowers in the short and intermediate term will look to institutions that will be perceived as the quality providers so that they’re not directed to this process,” Shapiro said. 

The GSE scrutiny on broker-involved agency loans could have a ripple effect across the CRE broker industry given that a significant portion of those agency deals have historically involved brokers, according to Yaakov Zar, who founded digital brokerage platform Lev in 2019. 

Zar said the GSEs’ crackdown makes it tougher for brokers to be competitive, and those who execute large volumes of agency deals may be attracted to executing the transactions in-house with fewer hurdles while also making more money in the process. He said that while brokers can play a valuable role in some deals by resolving conflicts, direct lender-to-sponsor relationships are becoming more attractive.  

“Lenders want to establish direct relationships with sponsors, and sponsors want direct relationships with lenders,” Zar said. “It’s truly better for everyone if those direct relationships exist.” 

The multifamily loan fraud the GSEs are trying to root out recently infected brokerage giant JLL (JLL), which lost $18 million from investors who fraudulently obtained a $74 million Fannie Mae loan for a Cincinnati multifamily property. The loss includes expenses associated with repurchasing the loan, which was originated by JLL and sold to Fannie in early 2019, JLL Chief Financial Officer Karen Brennan said during the company’s second-
quarter earnings call on Aug. 6.

The JLL earnings call came shortly after three real estate investors — Fredrick Schulman, Chaim “Eli” Puretz and Moshe “Mark” Silber — pleaded guilty on Aug. 1 to one count of conspiracy to commit wire fraud affecting a financial institution connected to the loan, according to the U.S. Department of Justice. The trio used a stolen identity and inflated the purchase price of the Williamsburg of Cincinnati, saying the apartment complex cost $96 million instead of the $70 million it was acquired for. 

Brennan said on the earnings call that JLL is monitoring additional smaller loans that might be subject to fraud, but the assets tied to the loans would have more “stabilized occupancy” than the Cincinnati property and account for less than 1 percent of its overall Fannie and Freddie portfolio.

Alexander Rosso, a partner with law firm Nixon Peabody’s affordable housing and real estate practice, said borrowers he counsels have often turned to agency loans for multifamily deals due to the speed at which they can be executed. He said the GSEs have been successfully aggressive in recent years with pricing and products to enable lenders to close loans quickly, and there is concern the new rules could uproot that. 

“The hope is that the regulations are going to be successful in curtailing the fraud that they’re designed to, but there’s always concern with a regulator, and a quasi-governmental one like the GSEs could go a step too far,” Rosso said. “I think historically they’ve been good about that, and our hope is that is what we will see here.” 

Andrew Coen can be reached at acoen@commercialobserver.com.