Property Fraud Allegations Snowball as Commercial Real-Estate Values Fall

Observant1

"U.S. prosecutors are cracking down on commercial mortgage fraud, a growing push that is sending shudders through the $4.7 trillion industry by raising questions about the numbers underpinning major property loans."

"At the heart of the problem is the way lenders underwrite commercial mortgages. Borrowers typically submit financial statements called T-12 that show building income and expenses for the past year. Lenders use these documents to estimate the building’s value and calculate how much they are willing to lend. But in most cases they don’t audit these statements to verify that the sums listed in the spreadsheets actually flowed in and out of the landlord’s accounts."

"Landlords have an incentive to come up with inflated building profits so that they can land bigger loans. But lenders also often have an incentive to accept these inflated numbers, especially if they plan to repackage the loan and sell it off to investors, Griffin said. That is because bigger loans mean bigger fees."

https://www.wsj.com/real-estate/property-fraud-allegations-snowball-as-commercial-real-estate-values-fall-492d964c?st=5b6slrn9dyyq3u9&reflink=desktopwebshare_permalink

BaluBalu

This looks like the variation of the housing disaster we had only 15 years ago. That was not too long ago and how the mechanics are already in rinse and repeat cycle. I guess greed never sleeps.

As a society, we admire / glorify people that commit white color crimes. The more blatant ones get elected to public offices.

(A easier fix would be to require the originators and underwriters to hold a percentage of the loans that they originate / bring to the market.)

Observant1

"A easier fix would be to require the originators and underwriters to hold
a percentage of the loans that they originate / bring to the market."

I agree that it's a good idea for lenders to have some skin in the game!

yogibearbull

Yet it is legal and acceptable for banks to carry CREs at their book values, i.e. the CREs don't have to be marked-to-market promptly. That was one of the issues that shook up the regional banks in early-2023. There are other problems too - e.g. HTM and AFS classifications of Treasurues and bonds held.

Those issues are just no longer in the news, but those problems didn't disappear.

BTW, originators of securitized debt (MBS, ABS, CLO) are now required to keep some on their books and there are also stricter clawback provisions for bad/defective debt found in the pool. These reforms came after the GFC.

Regional Bank ETF KRE https://stockcharts.com/h-sc/ui?s=KRE&p=D&yr=2&mn=0&dy=0&id=p19878069220

BaluBalu

"BTW, originators of securitized debt (MBS, ABS, CLO) are now required to keep some on their books and there are also stricter clawback provisions for bad/defective debt found in the pool. These reforms came after the GFC."

Thanks. I did not know if that applied to all originations. Given how Congressholes work for lobbyists, I thought that requirement was limited to residential mortgages. I am glad it applies to all.

So, why do we have moral hazard issues like the one in the OP? Are the thresholds not high enough to prevent more hazards?

Old_Joe

"Landlords have an incentive to come up with inflated building profits so that they can land bigger loans. But lenders also often have an incentive to accept these inflated numbers, especially if they plan to repackage the loan and sell it off to investors, Griffin said. That is because bigger loans mean bigger fees."

Goodness, I sure hope that Donald Trump doesn't hear about this... he might try to do the same sort of thing.

Derf

@Old_Joe Goodness, I sure hope that Donald Trump doesn't hear about this... he might try to do the same sort of thing. " Good one !