During 2025, the normal caution that usually accompanies matters of finance was suspended. Many stocks and asset classes from AI to crypto tokens achieved lofty heights based upon less than realistic appraisals much less actual substance.  In 2026, however, this forgiving, even exuberant environment has quickly evaporated in favor of a more realistic view of risk.

Take the world of urban multifamily mortgages. In January, the Office of the Inspector General at the FHFA published a heavily redacted report describing the losses incurred by Fannie Mae and Freddie Mac "to address suspected fraud found in its multifamily book of business."  

"In its 2024 annual report filed with the U.S. Securities and Exchange Commission," notes the OIG report, "Fannie Mae disclosed that it set aside $752 million to cover such losses. Fannie Mae included potential losses from mortgage fraud in its

multifamily business in its allowance for loan losses." Several vendors that operate in the multifamily sector tell NMN that losses to the GSEs may rise. 

As we've noted in this space previously, urban multifamily loans are the new subprime asset class. Why this harsh view? Because of the most powerful economic and political issue today, namely affordability. Urban tenants simply cannot afford to pay market rents for older multifamily apartments, forcing owners to cut back on most services and eventually default. 

Whereas the $3.5 trillion in prime residential mortgages owned by banks are still showing net loss rates close to zero, this due to high home prices, loss rates on relatively high quality bank owned multifamily assets have been close to 100% of the loan amount since COVID.

If average bank owned multifamily mortgages are performing this badly, just imagine the situation facing multifamily lenders that utilize guarantees from the GSEs or HUD. A classic example was the sale of several thousand rent stabilized apartments in New York City in January after the owner, Pinnacle Group, filed bankruptcy last year.

The newly inaugurated Mayor of New York, Zohran Mamdani, attempted to intervene in the sale of the properties, but was rebuffed by the bankruptcy court. In the city's filing, Mamdani admitted that the rents paid by residents were too low to make the assets viable, much less qualify for commercial financing, but offered no solutions.

Flagstar Bank (fka New York Community Bank) took an estimated loss of nearly $113 million on the sale of the Pinnacle Group's New York City rent-stabilized apartment portfolio.  But the bank is actually better off now because it no longer has exposure to these problematic assets. 

When rent-stabilized buildings go into default on the commercial mortgage, the owners typically divert cash flows to maintenance in an effort to keep the building habitable. "But even without having to pay debt service," notes Erik Engquist of The Real Deal ("Lessons for Mamdani in Spanish Harlem"), "the rent revenue — which Mamdani aims to freeze — simply isn't enough" to maintain the buildings.

Because many urban properties subject to rent-controls are essentially underwater in terms of the valuation and the net operating income from the property, some borrowers have turned to fraud in an effort to avoid foreclosure. HUD and the GSEs are prime targets for such borrowers because they lack the personnel and the resources to properly underwrite the risk.

The number one tactic used by borrowers to obtain loans from the GSEs, the OIG report notes, is overestimating the income from rental properties to get a higher loan amount with poor rental comps. But these same practices are also a growing problem in residential lending.

Residential mortgage fraud is a serious and growing risk, according to the National Association of Realtors, with losses from real estate wire fraud increasing fiftyfold in less than a decade to over $446 million in 2024.

Fraud in residential lending often involves the same practices as seen in multifamily lending, including falsifying documents (income, appraisal) or identity to secure loans. High-risk areas include New York and Florida, which have seen significant increases in undisclosed debt and transaction fraud.

"Loan fraud is a federal crime, notes Janet B. Thoren, Deputy Legal Counsel of the North Carolina Real Estate Commission. "In the past, most loan frauds consisted of a single transaction in which the purpose of the fraud was to get a particular buyer into a particular property that the buyer could not otherwise afford." 

While many readers of NMN might think that loan fraud is primarily an issue involving borrowers, in fact lenders also commit fraud with increasing frequency, specifically involving the financing and sale of loans in the secondary market. 

One area of particular concern is when lenders try to use the same asset to secure loans from multiple creditors. Yoram Keinan notes in a paper published by the World Bank that secured lending depends on three interlocking assumptions: that the collateral exists, that it is unique, and that ownership is clear and enforceable.

Ginnie Mae just issued an All Participants Memorandum (APM 26-2) reminding issuers that they "are prohibited from pooling any mortgages subject to beneficial interest, or selling a beneficial interest in mortgages pooled in a Ginnie Mae mortgage-backed security."

Now why, you might ask, does Ginnie Mae feel the need to remind issuers that they cannot double-pledge a loan, particularly a long one that has already been pooled into a security. The issue of double-pledging collateral reemerged in 2025 with the bankruptcy of First Brands, where 40% of the company's commercial paper had been pledged to more than one lender.  The officers of First Brands have since been charged with criminal fraud.

"The resurgence of double pledging at this stage of the credit cycle should not be dismissed as mere coincidence," writes Goghie Alexandru-Stefan on Substack. "The conditions that make such practices attractive are precisely those that tend to precede broader credit stress events."

More recently, several members of the Federal Home Loan Banks have reportedly attempted to finance loans already pledged as collateral on FHLB advances and even enlisted the help of several mortgage trades in Washington to advance this dubious concept. This situation arises most often with shared collateral rights such as a swap or asset securitization. 

Of course, a loan generally cannot be simultaneously pledged to the FHLBs and another creditor (e.g., the Federal Reserve Bank) or a securitization vehicle, but that does not mean that unscrupulous lenders will not try. But we should remember that loan fraud is a federal crime, punishable by up to 30 years in prison and $1 million in fines per count.

As credit risk becomes more pronounced in 2026 and beyond, disputes over collateral may become increasingly important. Practices that overstate the value of collateral or lead to disputes as to the priority of creditor claims all fall into the general category of fraud and can lead to losses by investors as well as the taxpayer.