As commercial property values decline given the rise in interest rates, defaults on mortgages are increasing. This, in turn, is giving rise to federal investigations uncovering several types of mortgage fraud.
In the past year, five different landlords in cities like Cincinnati, Hartford, and Little Rock have signed plea deals. The fraudulent activities included materially misstated financial statements and overstated property sales amounts that resulted in the defendant’s ability to receive larger loans.
In one case, the landlord included rents that weren’t actually collected from bad debts and free rental periods. The majority of the cases are on apartment building loans. In one case, they found that it was the mortgage broker, rather than the landlord who doctored the books.
Much of this fraud is due to the underwriting process of commercial loans. Auditing the financial statements presented for underwriting is an expensive and time consuming process. Most banks when competing for a loan won’t spend the money or time that would be necessary when the package comes in for a loan from a proven customer.
Federal Prosecutors are joining efforts with the FHA, Fannie Mae, and Freddie Mac to handle the increased caseloads. There’s no official numbers on the total number of cases, other than a major warning that they’re on the rise.
Let me leave you with this…
Before I start getting a bunch of hate emails from Liberals, Socialists, or other Trump-haters in general, please realize that our former President is not the reason behind this column. Sure, he’s in the middle of one of these cases, but that’s not the point.
Please understand that when a commercial loan goes bad, someone at the bank is going to get fired. The higher-ups are going to look for a scapegoat. At that point, the original loan package is going to get the scrutiny it probably should have received, before it went into the credit committee for approval.
If anyone can find any little thing wrong with that package, they’ll be able to save their jobs by referring it to the feds. And by any little thing, I do mean any little thing. Think about the process for a moment.
As part of the loan, banks ask borrowers for a personal financial statement. Okay. Let’s go through it.
1 – The first line is cash. No problem. You write down the reconciled balances of all of your checking accounts.
2 – The second line is Accounts Receivable. Okay. Same thing minus any potential bad debts.
3 – The third line is the value of real estate owned. Here we go. What do you put down? No one will ever actually know what a property is worth until it’s sold.
If you have misstated or over-valued even one piece of property, can you be convicted? Is there intent to defraud? Here come the lawyers. I’m sure you get my gist.
I’ve never even heard of a problem at a bank that couldn’t be solved with money, right up to the point where people’s jobs are in jeopardy. This is my way of telling all of you to be extremely conservative when filling out one of those Personal Financial Statements.
We never know what the future will bring. If that loan goes bad, no one needs the Feds telling you that you overvalued the price of your home on a mortgage application so many years ago.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.