Mortgage-Fraud

Leasing Lifestyle: Mortgage-Fraud – At issue is whether income from apartment complexes was falsified to support larger loans–which often became part of mortgage securities.

Owners of an apartment complex near Pittsburgh, who wanted to take out a mortgage on the buildings, allegedly made vacant units look occupied by turning on radios, placing shoes and mats outside doors and in one instance having a woman tell inspectors her boyfriend was asleep inside.

The owners obtained a $45.8 million loan, which was wrapped into mortgage securities and sold to investors.

Practices such as these—which were alleged in a federal search-warrant application—have sparked one of the largest mortgage-fraud investigations since the financial crisis. It focuses on whether income from commercial properties was falsified, a move that would enable owners to get larger mortgages and take out cash or expand their businesses faster.

Still in its early stages, the investigation has so far yielded a fraud-conspiracy indictment against four real-estate executives in upstate New York. Loans that some or all of them were involved with totaled about $170 million, the indictment alleges.

Investigators have sought mortgage data on dozens of other apartment buildings, according to documents reviewed by The Wall Street Journal and interviews with people familiar with the probe. Investigators have looked at student housing and self-storage facilities in addition to apartment complexes.

About $1.5 billion of securities issued by Fannie Mae and Freddie Mac are backed by mortgages from just one developer who has been under scrutiny, according to a Journal analysis of loan data from Thomson Reuters .

The Federal Bureau of Investigation, the U.S. attorney in the Western District of New York in Buffalo and the Federal Housing Finance Agency’s Inspector General are all working on the probe.

Lax and fraudulent lending on single-family homes played a role in inflating and popping the housing bubble a decade ago. The 2010 Dodd-Frank financial overhaul required home borrowers to document their income, and home lenders to verify it.

The rule doesn’t apply to multifamily housing. Lenders in that market review data submitted by borrowers to ensure the properties earn enough to repay loans, but they generally don’t examine every lease to check income. Neither do Fannie Mae and Freddie Mac , the government-sponsored mortgage giants that buy and securitize loans. Credit-rating firms that grade the securities for investors also generally don’t review loans for fraud.

The Federal Bureau of Investigation, the U.S. attorney in the Western District of New York in Buffalo and the Federal Housing Finance Agency’s Inspector General are all working on the probe.

Lax and fraudulent lending on single-family homes played a role in inflating and popping the housing bubble a decade ago. The 2010 Dodd-Frank financial overhaul required home borrowers to document their income, and home lenders to verify it.

The rule doesn’t apply to multifamily housing. Lenders in that market review data submitted by borrowers to ensure the properties earn enough to repay loans, but they generally don’t examine every lease to check income. Neither do Fannie Mae and Freddie Mac , the government-sponsored mortgage giants that buy and securitize loans. Credit-rating firms that grade the securities for investors also generally don’t review loans for fraud.

“All the systems will work fine as long as people are being honest,” said Sam Berns, senior vice president at NorthMarq Capital LLC, one of about two dozen firms licensed to originate and sell multifamily mortgages to Fannie Mae and Freddie Mac. If borrowers or their mortgage brokers choose, they can easily submit and certify false numbers, he said. “It’s a fault and a failure within the system.”

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