Sketchy Financing for Apartments and Private Markets Seems Like Deja Vu

Sonoma     Ten years on from the Great Recession of 2008, you wonder what we learned from that crisis, and who really learned it.  I mean really learned it!

Here’s a couple of scary examples that I’ll share in the “misery loves company” vein:

In the “who’s on first, what’s on second” vein, get this.  The major money center banks JP Morgan Chase, Citigroup. Bank of America, Wells Fargo and six others reportedly met with representatives of the Federal Reserve to lobby against Congressional meddling and regulatory backtracking on the Volcker rules, arguing that they wanted to keep them and they had worked so why the mucking around.  When the foxes are saying that the chickens are interring with them, you know the world of finance – and government — is upside down.

That doesn’t scare you?  How about this?  A Wall Street Journal item on the back pages in the “Heard on the Street” column pointed out that banks have been increasing their loans and exposure in financing private equity and private credit lines for business “in indirect ways that are hard to track.”  Whoa, Nelly!  That’s not good.  Going farther, they note that “loans to nonbank financial companies have been the fastest-growing element in global cross-border lending for the past two years.”  There are some $6 trillion of such loans. Nonbank financial companies already define a black hole of largely invisible and virtually unregulated activities with folks like KKR Capital Markets and Jeffries Financial Group.  Add to that the fact that many of these loans are also offshore.  When you wake up screaming in the middle of the night, write those names down and worry about these problems until you pass out again and pretend along with lawmakers that this is “no problem.”

But of course, there’s not just meddling and shadow financing, there’s outright fraud like we saw from mortgage brokers last time around.  The biggest investigation of mortgage fraud since 2008 involving the FBI, the US attorney, and the Inspector General for the Federal Housing Financing Agency which is supposed to oversee Fannie Mae and Freddie Mac is looking at a potential heist in multifamily housing that was curiously exempted in the Dodd-Frank rules after 2008.  Essentially, Fannie and Freddie have been allowing almost a self-certification system by borrowers of their own balance sheets.  One outfit being investigated was claiming cashflow from rented apartments that Freddie didn’t inspect rigorously before guaranteeing the loan and getting away with it by putting radios in vacant apartments and other shenanigans to inflate the rental cashflow statistics.  Once they get the loan it can be “take the money and run time” because, get this, again hidden in a Wall Street Journal article, “Mortgages with full or partial interest-only repayment periods made up 75% of multifamily loans bought by Fannie Mae and Freddie Mac” in 2017.

So sure, this is complicated and way trickier than balancing our home checkbooks but with the Developer-in-Chief in Washington ignoring all of the fine print of government, especially among his developer tribe, if we’re not worried, it may be because we’re not paying enough attention.

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