Fannie Mae, Freddie Mac Multifamily Changes Impact Handling of Funds

Mortgage Fraud Led GSEs to Modify Requirements

Fannie Mae and Freddie Mac recently updated their Multifamily Seller/Servicer Guides changing requirements for the handling of escrow and settlement functions involving mortgage transactions and the acquisition of multifamily properties.

The revisions were in response to several fraudulent transactions involving multifamily properties where the actual purchase price was not reported. The fraudulent activity resulted in inflated loans. ALTA is closely monitoring this issue and will be communicating with the government sponsored enterprises on developments in this area.

Freddie Mac

Freddie Mac on Oct. 17 issued a revision to its updated Multifamily Seller/Servicer Guide changing requirements for the handling of escrow and settlement functions involving multifamily properties. As announced Aug. 15 in a bulletin, Freddie Mac started requiring title insurance underwriters to receive and disburse all the funds associated with these types of transactions. Underwriters must also deliver the Settlement Statement to the seller/servicer or the seller/servicer’s counsel.

In its latest bulletin, Freddie Mac stated that if an underwriter doesn’t offer closing services in an attorney state, then an attorney agent can handle the escrow and/or settlement functions.

Specifically, the bulletin says:

For acquisition Mortgage origination transactions, if the law of the jurisdiction in which the Property is located prohibits the use of anyone other than a licensed attorney for escrow and/or settlement functions, and the Seller/Servicer, Seller/Servicer’s counsel or Single Counsel has confirmed that the Title Insurance Underwriter or its wholly-owned subsidiary or affiliate under identical ownership does not have a licensed attorney on staff in such jurisdiction who can fulfill this requirement, the Seller/ Servicer’s counsel or Single Counsel, as applicable, must notify the applicable Freddie Mac transactional attorney prior to the Seller/Servicer’s submission of the full underwriting package.

Fannie Mae

Fannie Mae’s change wasn’t as drastic, but requires information about the flow of funds involving loans for multifamily transactions. According to Lender Letter 24-05, title companies and escrow agents must provide a receipts and disbursements ledger for transactions—or other written evidence—showing:

the source of all funds deposited (with federal funds wires and full entity names) into the closing escrow (including good faith deposits and all other funds required for acquisition or cash-in refinance, if applicable)
the flow of all funds disbursed from the closing escrow for the mortgage loan (and any acquisition or assumption, if applicable), whether by check or federal funds wires (with full entity names)

The delivery requirement document may be used immediately and must be used for all mortgage loans with a confirmed commitment date on or after Sept. 24, 2024.

It’s expected Fannie Mae will make additional changes after it identified gaps in its processes for managing multifamily loan origination fraud risk and for overseeing our multifamily seller/ servicer counterparties.

In its quarterly SEC filing, Fannie Mae reported it has “discovered instances of multifamily lending transactions in which one or more of the parties involved engaged in mortgage fraud or possible mortgage fraud, and we continue to investigate additional multifamily lending transactions in which we suspect fraud may have occurred.”

Fannie Mae said it delegates underwriting in which lenders make specific representations and warranties about the characteristics of the mortgage loans it purchases and securitizes.

“As a result, we do not independently verify most borrower information that is provided to us,” Fannie Mae said in its filing.

“This exposes us to the risk that one or more of the parties involved in a transaction (such as the borrower, borrower’s attorney, sponsor, seller, broker, appraiser, property inspector, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan.”

In February, Fannie Mae notified its lenders it would no longer accept loans from Riverside Abstract and Madison Title. The title companies were involved in deals with New York City-based investor Boruch Drillman, who pleaded guilty in a $165 million mortgage fraud case last year.

Additionally, three real estate investors pleaded guilty to conspiracy in a $119 million mortgage fraud scheme involving a Fannie Mae loan, according to the Department of Justice.

Best Practices

Title companies are encouraged to implement ALTA’s Best Practices and showcase to their lender clients the policies and procedures that are followed to ensure a positive and compliant real estate settlement experience.

Specifically, Pillar 2 of ALTA’s Best Practices recommends procedures to help ensure accuracy and minimize the risk of loss of funds.

With fraud continuing to increase, it’s important settlement service providers understand the demands being put on lenders. Financial institutions will be more inclined to work with title companies, attorneys and settlement service providers that can ensure the least amount of risk when closing real estate transactions.