It seems that some folks were asleep during the mortgage crisis, thus failing to internalize the risk of mortgage fraud. This time, the alleged frauds involve commercial mortgage loans for rental properties. In order to pump up the perceptions of their income stream, the owners of rental properties who were seeking mortgages on those properties made their occupancy rates look higher than they really were. By placing mats outside apartment doors (along with pairs of shoes) and placing radios playing music inside apartments, and even hiring women in apartments turn away inspectors with stories of “sleeping boyfriends,” the owners were able to secure substantial mortgages. Their staged Potemkin villages were just the ticket for securing high-dollar mortgages, which were, of course, then securitized. Lo and behold, we are back in 2006 once again.
Dodd-Frank imposed income verification requirements on consumer loans, but the statute missed multifamily unit mortgages. One expert in the field noted about multi-family unit lending, “All the systems will work fine as long as people are being honest.” Ah, there’s the rub indeed.
Perhaps trust but verify should make its way into commercial lending. We might put it this way — where there are lax processes, creative minds find a way to game those systems. Assume creative minds, and insert verifications to pick up the slack and deter the creative.