The Federal Housing Finance Agency (FHFA), government sponsored enterprises Fannie Mae and Freddie Mac and criminal authorities are cracking down on fraud in commercial mortgage lending. They have more motivation than ever because the increased incidence of fraud has impacted the agencies’ balance sheets — Fannie Mae reported earlier this year a $752 million charge to cover losses related to multifamily lending fraud. Moreover, the Trump administration’s desire to conduct a public share offering for Fannie Mae and Freddie Mac has encouraged the agencies to shift losses from non-performing loans and overvalued assets onto lenders.
A number of factors have led to the dramatic increase in fraud in multifamily lending, where more than $288 billion of mortgages were originated in 2024. These include the increase in interest rates over the past few years and the prevalence of short-term debt, limiting available loan proceeds for required refinancings, and inadequate agency and lender due diligence requirements.
Because a majority of multifamily mortgages are packaged and sold on Wall Street as mortgage-backed securities, and the vast majority of these are loans originated by commercial lenders and then purchased and securitized by Fannie Mae or Freddie Mac, mortgage fraud has widespread implications for both the lending industry and investors.
While the agencies historically have been slow to identify and respond to malignant trends, the agencies have recently answered with new anti-fraud policies, investigations and scrutiny of lenders and industry participants.
These measures have put significant pressure on the industry. In some cases, this scrutiny has resulted in harsh outcomes, including forced loan buybacks, loss sharing by lenders, probationary measures and threatened or actual suspensions that many consider to be unforeseen collateral consequences due to the misconduct of others. As the agencies react to the incidence of fraud and try to clean up their balance sheets, lenders and others need to prepare accordingly.
Uptick in Agency Fraud Investigations
Fannie Mae and Freddie Mac have different rules and practices around fraud investigations. Both agencies have the authority and market power to demand inspection of books and records of market participants involved in their loans. Over the past 18 months, Fannie Mae has been actively investigating fraud loans through outside counsel, and in some cases shifting the cost of those investigations to the lenders. In July 2025, Freddie Mac implemented its own new rules around fraud investigations. The new rules clarify that Freddie Mac may direct lenders to conduct investigations. According to the rules, this includes investigations “into seller/servicers’ past or present employees and/or past or present practices.” Lenders must cooperate to remain in good standing.
The agencies have not limited their scrutiny to lenders. They have been evaluating the conduct of real estate developers, appraisers, brokers and attorneys. Although these other market participants do not have the same contractual obligations to cooperate that lenders have, the agencies have been successful in obtaining information from them because a failure to respond can result in suspension from doing business with the agencies.
Use of AI Surveillance Methods and Cooperation with Other Agencies
Fannie Mae and Freddie Mac are sharing information and partnering with technology firms, deploying new artificial intelligence (AI) and data analytics tools to identify potential fraud. This involves aggregating agency and commercially available data related to individual borrowers, corporate registrations and public filings, property information, comparable sales data, market rent information and prior loans to identify inconsistencies. For example, in loan applications, borrower financial representations, claimed rental information about a particular property or other aspects of underwriting such as appraisals can be compared with other data.
The agencies are also sharing information with each other more than ever before, and scrutiny by one agency can lead to scrutiny by the other. They are also working closely with criminal authorities to refer matters when their information suggests potential criminal wrongdoing. Both agencies have also created dedicated fraud units, such as Fannie Mae’s new Crime Detection Unit. These efforts have resulted in high-profile investigations and criminal prosecutions that have captured the attention of the industry like never before.
Increased Consequences for Lenders and Other Industry Participants
The stakes for lenders and market participants entangled in fraud investigations could not be higher. While many recent high-profile fraud investigations have involved alleged criminal conduct by borrowers, the agency investigations have been far more impactful to the industry because Fannie Mae and Freddie Mac have been imposing their own sanctions for alleged misconduct without specific standards of review or transparency.
For example, they have no established process that allows those impacted to challenge decisions or the information used to make them. These suspensions and disqualifications have recently involved, among other things, alleged passive participation in a suspicious transaction where the suspended individual was not actively involved.
Suspensions have also resulted from appraisal independence concerns, such as communications that could imply pressure on an appraisal valuation or transmission of financial information when questions arise about chain-of-custody and knowledge of inaccuracies. While these suspensions are not publicly reported by the agencies, they can cause substantial reputational damage. Advocacy related to removal from agency suspensions can last months or years.
Perhaps most consequential for lenders, both agencies can compel lenders to repurchase loans or engage in loss-sharing under certain conditions, such as violations of their respective seller-servicer agreements. This can include a non-monetary default, like that caused by borrower fraud committed during the lending process. The agencies are clearly focused on ridding their books of bad loans and have significant power to decide on the fate of loans and loss-sharing, given their outsized position in the market.
Considerations for Commercial Lenders and Financial Services Companies
These efforts to root out fraud in multifamily lending have had a widespread impact. Lenders and others should reevaluate their policies and procedures around fraud detection and prevention, including how to enhance due diligence.
This should include calibrated scrutiny of the borrower or seller depending on risk factors and fully understanding the financial aspects of a transaction including the flow of funds.
Lenders and others should also better understand how the agencies are conducting these investigations and develop response strategies. This may involve maintaining a cooperative posture, while also collecting information and responding in a way that allows for a meaningful rebuttal if the agency takes an adverse decision.
Finally, lenders and others should learn lessons from recent fraud investigations and agency initiatives to avoid the substantial and potentially unfair consequences that can result.
Jerrob Duffy is a former federal prosecutor with experience investigating and prosecuting commercial lending fraud. He is a partner at Hogan Lovells LLP, where he focuses on financial services regulatory defense, investigations and compliance matters.