Fraud allegations against rental owners reach new high – Inman

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Regulators and prosecutors are cracking down on landlords who’ve been falsifying income and expense data on crucial loan documents, according to a new feature published by “The Wall Street Journal.”

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Fannie Mae, Freddie Mac and the Federal Housing Finance Agency are teaming up with federal prosecutors to crack down on a rising number of multifamily landlords submitting inflated financial statements to get larger loans.

Regulators, prosecutors, and commercial brokers told The Wall Street Journal that rising interest rates and default rates, paired with weakening property values, have exposed the severity of the issue, which centers around the underwriting process for commercial mortgages.

Lenders make their lending decisions based on a T-12 form, which outlines a building’s annual income and expenses. Landlords can exclude one-time expenses and disclose them as footnotes, the article explained. However, lenders are inconsistent about properly auditing, leaving the door open for unscrupulous landlords to inflate their finances.

The WSJ said the number of real estate fraud investigations isn’t publicly available. Still, at least five landlords in Cincinnati; Hartford, Connecticut; and Little Rock, Arkansas, have pleaded guilty to federal fraud charges since January. In those cases, landlords allegedly altered their T-12 form to exaggerate their building income or faked property sales to get larger loans.

Another case involving Michigan-based landlord ROCO Real Estate and JP Morgan Chase made headlines in 2023 when ROCO Real Estate co-CEO Tyler Ross inflated his Tallahassee, Florida, rental apartment complex’s profits by 117 percent from $296,000 to $644,000.

The buyer, NYC-based Cherit Group, used JP Morgan Chase to underwrite a loan to purchase the Tallahassee property and 54 other ROCO properties across the U.S. for $418 million based on the falsified T-12 statements Ross provided. Cherit Group defaulted on the Tallahassee property in late 2022.

Ross pleaded guilty to falsifying his T-12 statements but said he shared accurate income and expense numbers with Cherit in a separate document.

“Mortgage fraud is a serious offense that affects lenders and borrowers alike,” Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division said of Ross’ crimes in a joint statement with the U.S. Department of Justice.  “This case demonstrates the FBI’s continued commitment to protecting our banking and mortgage industry by going after anyone who obtains loans under false pretenses.”

Although cases like Ross’ are rare, Fannie Mae and Freddie Mac have taken steps to keep landlords in line. Both groups have made a major push to ban brokers who falsify financial statements. Freddie Mac now requires landlords to provide rent receipts and advises lenders to inspect rental units to ensure they’re occupied. Both measures helped Freddie Mac identify and decline loans with questionable financial information.

University of Texas McCombs School of Business professor John Griffin said the uptick in real estate fraud over the past year fits with historical trends.

“It’s a general trend throughout history that fraud occurs during boom times and is revealed during bust times,” he told The WSJ. 

Email Marian McPherson

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