Lax and fraudulent lending on single-family homes played a role in inflating and popping the housing bubble a decade ago. The 2010 Dodd-Frank financial overhaul required home borrowers to document their income, and home lenders to verify it, but the rule doesn’t apply to multifamily housing, the Wall Street Journal reported. Lenders in that market review data submitted by borrowers to ensure the properties earn enough to repay loans, but they generally don’t examine every lease to check income. Neither do Fannie Mae and Freddie Mac, the government-sponsored mortgage giants that buy and securitize loans. Credit-rating firms that grade the securities for investors also generally don’t review loans for fraud. Owners of an apartment complex near Pittsburgh, who wanted to take out a mortgage on the buildings, allegedly made vacant units look occupied by turning on radios, placing shoes and mats outside doors and in one instance having a woman tell inspectors her boyfriend was asleep inside. The owners obtained a $45.8 million loan, which was wrapped into mortgage securities and sold to investors. Practices such as these — which were alleged in a federal search-warrant application — have sparked one of the largest mortgage-fraud investigations since the financial crisis. It focuses on whether income from commercial properties was falsified, a move that would enable owners to get larger mortgages and take out cash or expand their businesses faster. Still in its early stages, the investigation has so far yielded a fraud-conspiracy indictment against four real-estate executives in upstate New York. Loans that some or all of them were involved with totaled about $170 million, the indictment alleges.
