Fannie Mae's $752M Provision: A Blow from Multifamily Fraud

Fannie Mae, the government-sponsored enterprise (GSE) responsible for purchasing and securitizing mortgages, has set aside $752 million as a provision for credit losses in its multifamily lending portfolio. This significant provision is partly attributed to instances of mortgage fraud, highlighting the challenges faced by the agency in managing risks within its multifamily lending sector.

Fannie Mae's annual filing for 2024 revealed that the GSE had experienced financial losses due to mortgage fraud, with certain gaps identified in its processes for managing multifamily loan origination fraud risk and overseeing its multifamily seller/servicer counterparties. The agency acknowledged that it may experience additional financial losses as a result of mortgage fraud in the future, even after implementing process improvements.

One notable case of mortgage fraud involving Fannie Mae occurred in August 2024, when three fraudulent investors pleaded guilty to conspiracy in a mortgage fraud scheme. The trio had purchased an apartment building for $70 million in 2019 but presented their lender and Fannie Mae with falsified documentation stating the property's purchase price was just under $96 million. As a result, Fannie Mae and the lender granted a $74 million loan based on the false information, contributing to the $752 million provision for credit losses.

Fannie Mae's underwriting process for multifamily loans contributes to the risk of fraud due to its delegated nature. The agency relies on its lenders to present the characteristics of the mortgage loans it purchases and securitizes, without usually independently verifying this information. This exposes Fannie Mae to the risk that one or more parties involved in a transaction may engage in fraud by misrepresenting facts about a mortgage loan.

To mitigate this risk, Fannie Mae is taking several steps to improve its processes for managing multifamily loan origination fraud risk and strengthen its oversight of multifamily seller and servicer counterparties. The agency has also notified its lenders that it would no longer accept loans from Riverside Abstract and Madison Title, two Lakewood, New Jersey-based title insurers, due to their alleged links to fraudulent deals involving New York City-based investor Boruch Drillman.

Fannie Mae's financial performance has been impacted by rising delinquencies and fraud, with its net income for the third quarter of 2024 down from the previous quarter. The provision for credit losses due to ARM loans rose significantly, indicating the impact of these challenges on the company's financial performance. Despite these setbacks, Fannie Mae remains committed to addressing the fraud risk in its multifamily loan underwriting process and building reserves to withstand economic downturns.

In conclusion, Fannie Mae's $752 million provision for credit losses highlights the significant impact of mortgage fraud on the GSE's financial performance and its ability to support the multifamily sector. The agency must address these challenges by improving its processes for managing fraud risk and oversight of counterparties, as well as building reserves to withstand economic downturns. Fannie Mae's actions, such as notifying lenders about fraudulent title insurers and investigating suspected fraudulent transactions, demonstrate its commitment to mitigating the impact of fraud on its business.