Commercial Mortgage Fraud Haunts Lenders

As if rising defaults weren’t enough of a worry for the banking industry, federal investigators say they are uncovering significant fraud in the financial statements banks relied upon in lending funds to commercial property owners. Fraud occurred between the mid-2010s and 2021 when property values were soaring, as some landlords, seeking to maximize the amount they could borrow, manipulated their income and revenues or claimed property sales at inflated prices, according to a Wall Street Journal report. Consequently, some of the properties today do not generate adequate income to repay the loans.

“It’s a general trend throughout history that fraud occurs during boom times and is revealed during bust times,” said John Griffin, a professor of finance at the University of Texas’ McCombs School of Business told The Journal.

When the commercial real estate market was booming, lenders were less-than-rigorous in assessing the value of buildings, eager to generate loans and avoid the expense of auditing a landlord’s financial books. They typically accepted statements that purported to show a building’s income and expenses for the past year.

At least five commercial property landlords, owners of apartment buildings in Cincinnati, Tallahassee, Hartford, and Little Rock, recently pled guilty to real estate fraud charges.

Federal prosecutors are stepping up their investigations, working with the Office of Inspector General at the Federal Housing Finance Agency, according to The Wall Street Journal.