Mortgage Fraud Crackdown: Learn from the Experts

In the ‘96 blockbuster The Rock, the FBI, seeking to rescue hostages being held on Alcatraz by a rogue marine group, turns to an incarcerated intelligence operative who was the only man to ever break out of the notorious island prison. In exchange for his freedom, they demand he help break them in. 

That’s kinda the state of play in the agency mortgage-fraud crackdown. In a bid to tighten lending standards and end practices that led to some of the more egregious cases of wrongdoing, the FHFA looks to have picked the brains of some of the perpetrators who’ve taken plea deals 🤲 . The learnings from their fact-finding missions have manifested in updated Fannie guidelines released this week, titled “Potential Red Flags for Mortgage Fraud and Other Suspicious Activity.” 🚩🚩🚩

The document singles out practices that are common shtick: scoring a loan underwritten to a higher occupancy than the true occupancy at the time, appraisals that don’t jive w/ a property’s historical operating statements, broker-prepared (as opposed to sponsor-prepared) financial statements. It also asks its DUS lenders to look out for unicorn deals – properties that are performing miraculously better than their peers 🦄 

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Fannie (Cont.)

The guidelines, effective 4/1, tell lenders to ask Qs abt the ecosystem 🕸️ of a mortgage deal, IDing various nodes – appraisals, property management, capstack – that could corrode the transaction. On appraisals, for e.g., it states: “Is there a reasonable explanation for the inconsistent data or the use of a valuation method by the Appraiser that is inconsistent w/ standard practices?” It asks lenders to look for unconventional financing arrangements, rapid re-trading of assets, & discrepancies in figures submitted to underwriting vs. asset management. It also gives significant ink to the issue of arms-length deals 💪 - lenders should understand the r’ship btw. the sponsor and the entity providing cash for the closing. And then there are tinier but still-spicy things: discrepancies in font styles, or unusual spacing. 

After years of due diligence being more of a T-shirt slogan than actionable practice at the GSEs, it’s a significant and well-informed escalation. I’ll note that many of the above issues have come up in the mortgage-fraud cases that have been playing out over the past 18 months: appraisers have been dinged, brokerages have been blacklisted, and sponsors are facing slammer time – I recommend reading our Xmas recap here. Fannie also has a sponsor blacklist of 8 players, per TRD, w/ internal emails showing $700M in exposure to them as of March ‘24.

There’s historically been no clean line to separate merely questionable activity from outright wrongdoing – as convicted fraudster Eli Puretz recently put it: “From light gray to dark gray goes very very fast.” The pain point for lenders: These add’l hoops could slow down dealmaking thru Fannie, an agency which already isn’t known for moving fast – Jamie Dimon would have something to say about its remote-work policy 😉 
 

Multi Megadeal Hits Market

With pricing taking a turn for the better and AUM gobblers in buy mode, a major multi landlord feels it’s time to cash in some chips: Birge & Held is looking to sell a majority stake in a nearly 6K-unit, 25-property portfolio, per REA, targeting a valuation of $1.5B, or $255K/unit. It has tapped Newmark to shop the deal, which is the largest to hit the market so far this year & could be split into 3 chunks. Birge & Held also wants a partner who’d provide $500M in add’l juice for acquisitions. 🧃 The offering comes in an environment increasingly ripe for big-ticket multi deals: We had Blackstone’s $10B AIR Communities deal in April, Brookfield’s $1.55B buy of a 7.3K-unit Starwood package in May, KKR’s $2.1B Quarterra acquisition in June and EQR’s $1B purchase of a Blackstone joint in August.

Whale of a Time in Brooklyn

Brooklyn’s Sunset Park is not a neighborhood you’d typically associate w/ big-ticket dealmaking, but one hulking industrial property is a delightful exception: The Whale Building has captured the hearts and dollars of core New York core players: Madison Realty Capital paid Harry Skydell a whopping $82.5M for the 500K sf joint in ‘15, when industrial-office plays in cool BK nabes were all the rage, and scored $88M in financing from TPG at the time. Madison brought the beautiful game ⚽️ to the property, but plans for the conversion sputtered, and in ‘20 Madison sold a majority stake to Elie Schwartz’s Nightingale Properties 😻 for an $84M valuation. Nightingale assumed the TPG debt and then, of course, defaulted on it: In summer ’23, Joshua Zamir’s Capstone swooped in, taking over the property by buying the note, which had a UPB of $71M, for just under $50M, per sources familiar w/ the deal. It financed the deal w/ a loan from Argentic, and is now looking to recap the property w/ $6M in new pref and a new lender to take out Argentic, according to a prospectus reviewed by The Promote: It’s been in talks w/ a couple prospects, including BH3, the group that funded its recent Downtown Brooklyn spec office takeover. Per the prospectus, Capstone has signed NYU to a 50K sf lease and has a signed LOI w/ trampoline park Sky Zone for another 60K sf. 🦘 

Capstone’s partners on the deal are Namdar & Seastone Capital (whose principal, Adam Goodstein, is the SiL of Brooklyn’s alpha broker Aaron Jungreis.) Executing on this thing where so many before have failed could provide a whopper – or shall we say whale? – of a return. 🐳 

CIM’s Salt Lake Sizzle

CIM & Novva Data Centers have scored a $2B financing package from JPM & Starwood Property Trust for a 100-acre data center project just outside Utah’s Salt Lake City. The developers, per WSJ, have struck a deal w/ a local electric utility that will allow them to provide 175MW of juice – remember that in the data center game, access to power is one of the primary constraints. JPM is fast establishing itself as an alpha financier in this emerging asset class: It committed $2.3B at the top of this year to a Blue Owl-led data center project in Texas that is leased to Oracle. But the field’s quickly getting crowded: Apollo’s in talks to be the lead capital provider on a $35B financing package for Meta’s data-center development ambitions.

Teacher Tantrum

Fee owner TIAA is looking to boot SL Green from its leasehold at 2 Herald Square, w/ the pension fund alleging that the REIT refuses to cough up $16M in back rent, $8M in taxes, and other sundries over the past year. TIAA has declared that SLG’s lease is now terminated; SLG insists that its default was “justified because there had been a downturn in the commercial leasing market.” In a statement to PincusCo, SLG says TIAA has hurt the asset by regularly flip-flopping on its strategy, “which is demonstrated by this most recent attempt to block SL Green’s signing of a sizable lease that would re-stabilize the property.”

Poor TIAA – it bought the fee from SLG for $365M in ‘14, at a time when Sitt Asset Management 🙃 owned the leasehold. In ‘18, SLG bought into the leasehold, and upped its stake for next to nothing last year. Expect heaps more of these kinds of disputes at Manhattan’s sadder assets in coming months.

Quickies

• 🎥 Fortress/Charles Cohen dispute: Time for talk is over

• Trustee moves to evict Elie Schwartz from $19M penthouse

• Apollo lends $275M to refi Rockpoint’s FiDi rentals

• Newmark poaches marquee Eastdil multi Boler/Smolen team

• About-face: GSA pulls 443 properties off the chopping block 🪓

• Sod v Wercberger: Judge weighs in (full catch up here)

• Fear & Loathing in Las Vegas: Inside structured finance’s big shindig

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