The Hidden Dangers of Inflated Financial Statements in Real Estate

Lisa Mailhot  |  July 15, 2024

Buyers

The Hidden Dangers of Inflated Financial Statements in Real Estate

 

Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency are joining forces with federal prosecutors to address a significant problem in the real estate sector: multifamily landlords submitting inflated financial statements to secure larger loans. This collaboration aims to curb fraudulent practices that have become more apparent with rising interest rates and default rates.

The Underwriting Process and Its Vulnerabilities

The core of this issue lies in the underwriting process for commercial mortgages. Lenders rely on the T-12 form, which details a building's annual income and expenses. However, inconsistencies in lender audits allow some landlords to inflate their finances by excluding one-time expenses or fabricating income figures.

Real Estate Fraud Cases

The number of real estate fraud investigations isn't publicly available, but recent cases highlight the severity of this issue. For example, in 2023, Michigan-based landlord ROCO Real Estate was involved in a high-profile case where co-CEO Tyler Ross inflated his Tallahassee rental apartment complex's profits by 117 percent. This fraudulent information led to a $418 million purchase, which later defaulted.

Regulatory Responses and Preventive Measures

To counteract such fraudulent activities, Fannie Mae and Freddie Mac have implemented stringent measures. These include banning brokers who falsify financial statements and requiring landlords to provide rent receipts. Lenders are also advised to inspect rental units to verify occupancy, helping identify and decline loans based on dubious financial information.

University of Texas McCombs School of Business professor John Griffin noted, “It’s a general trend throughout history that fraud occurs during boom times and is revealed during bust times.” This pattern underscores the importance of vigilant financial oversight, especially in fluctuating markets.

Bottomline

Mortgage fraud is a serious offense with wide-reaching consequences for both lenders and borrowers. The collaborative efforts of Fannie Mae, Freddie Mac, and federal prosecutors are crucial in maintaining integrity within the real estate market. If you’re looking to move to Orange County, let's connect!

 

 

Reference: The Wall Street Journal, "Fannie Mae, Freddie Mac and the Federal Housing Finance Agency team up with federal prosecutors to crack down on a rising number of multifamily landlords submitting inflated financial statements to get larger loans."

RECENT BLOG POSTS

Builders Struggling with Rates and Tariffs in May

The construction of single-family homes remained slow in May as builders face the dual challenges of high interest rates and tariff-related cost increases. Learn how t… Read more

Boost Your Home’s Value with These Paint Colors

Discover how strategic paint choices can increase the value of your property listings. A new Zillow study reveals the best colors to use for boosting home value. Find … Read more

Shrinking Down Payments Signal a Cooling Housing Market

Homebuyer down payments are shrinking for the first time in nearly two years, revealing key shifts in the U.S. housing market. FHA and VA loans are gaining popularity,… Read more

A Golden Break: States Offering Property Tax Relief for Seniors

With property taxes on the rise, senior homeowners are feeling the pinch—especially in high-value areas like Orange County. This blog explores how 16 states (plus D.C.… Read more

Rising Inventory Sparks Jump in Loan Applications

Despite mortgage rates holding steady in the high 6% range, improving housing inventory is driving renewed buyer interest. Last week, purchase loan applications surged… Read more

Investors Are Selling Homes at Record Pace

In 2024, investors made up 11% of all U.S. home sales — the highest in over 20 years — as they raced to cut losses amid softening markets and easing rents. Learn how t… Read more

Take Your Shoes Off—It Could Boost Your Home Sale by 2.5%

Could a no-shoes policy really help you sell your home for more? Discover how pristine flooring can elevate your property’s value, impress buyers, and create a cleaner… Read more

How To Sell a Home With Negative Equity

If you're stuck with a mortgage that's higher than your home's current value, you're not alone. Learn what it means to be underwater on your mortgage, why it happens, … Read more

Why Most American Homeowners Prefer Staying In

Nearly three-quarters of U.S. homeowners say they’d rather be home than anywhere else. In this blog, we explore how Americans feel about their homes, what it takes to … Read more

We are excited to assist you in finding your perfect home

Let's find a time that suits you best to chat about your goals, show you how we work, and figure out how we can help you the most