GSEs appear set to change multifamily lending rules

The government-sponsored enterprises are prepared to impose tighter lending rules on multifamily finance in an effort to reduce fraud risk, according to news reported Tuesday.

Fannie Mae and Freddie Mac will require commercial lenders independently verify financial information of borrowers, possibly to include available cash on hand and sources of funding, a Wall Street Journal article said. They may also be set to mandate greater due diligence surrounding the appraised value of multifamily properties. 

Any new regulation is aimed at mitigating potential fraud risk within the segment, which currently allows lenders to operate with less supervision. But it also runs the risk of slowing business activity, which rebounded quickly following the pandemic. 

At the end of the first quarter, Fannie Mae and Freddie Mac holdings of multifamily debt outstanding stood at $1.01 billion, or a 48.2% share of the total.  

Any potential rule changes could appear as early as this summer. It comes as the GSEs heighten their scrutiny of lenders after a months-long Freddie Mac investigation into Meridian Capital Group revealed the firm's brokers had altered client financials to obtain larger loans. Once among the largest beneficiaries of Fannie and Freddie financing, Meridian has since effectively been blacklisted by both enterprises and replaced its CEO earlier this year.  

Earlier this year, Freddie Mac updated its multifamily seller/servicer guide to require more inspections at properties it finances and confirmation of tenant rent payments. 

Last week, managers at Rhodium Advisors also pleaded guilty to wire fraud for their dealings in the purchase of a multifamily complex in Cincinnati financed by Fannie Mae. Conspirators had presented falsified documents to lenders and the GSE to obtain funding at an amount larger than the sales price.     

The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, declined a request for comment on any potential rule changes.  

Real estate fraud remains an ongoing risk in both commercial and residential lending, according to a recent report from Fundingshield. In the second quarter, close to half of all transactions contained errors that could point to title or wire fraud, the cybersecurity firm said.   

Although the full impact of any rule changes on lender operations is still a question mark, multifamily growth in the long term looks set to grow as the housing industry deals with scarce for-sale inventory, Freddie Mac said last month. While new multifamily construction slowed over the past year compared to 2022, an expected fall in interest rates this year would provide a boost to investors.