Merchants Bancorp of Indiana, a regional bank with a $500M multifamily loan book, has more than quintupled the money it has set aside to cover potential losses because of an increase in fraud in its loan portfolio.
A Merchants Bank branch in Spring Grove, Minnesota.
Merchants Bank’s net income fell by 50%, or roughly $38M year-over-year, in the second quarter because of declining multifamily values and the discovery of fraud or suspected fraud among some of its customers, the company announced Monday.
It increased its provisions for credit losses by $45M between the first and second quarters from $7.7M to $53M.
“We have implemented strategies to address our asset quality issues and to enhance our overall risk management practices to ensure long-term resilience,” Merchants Bank President Michael Dunlap said in a statement. “We are optimistic about our future and confident that our collective efforts will drive the stability and growth of our institution.”
Mortgage fraud has been a growing concern among multifamily lenders and the government-sponsored enterprise that guarantee tens of billions in apartment loans a year.
Merchants, one of the few banks to acknowledge its portfolio has been affected by mortgage loan fraud, said it wrote down 14 customers totaling $46M in Q2, compared with $3.5M in write-downs in the second quarter of last year, focused mainly on a subset of subordinated loans that Merchants no longer offers, according to its earnings release.
The fraud issue “has also impacted a number of other multi-family lenders,” Merchants CEO Michael Petrie said in a statement.
The bank also sought additional information through court-appointed receivers on the collateral backing its challenged loans, prompting Merchants to raise the amount of loans classified as substandard to $417.7M from $323.6M at the end of March, according to the release.
“These subordinated loans have been largely identified and evaluated for potential losses that have either been included in the provision for credit losses as specific reserves or charged off,” the company said in the release.
While Merchants didn’t reveal the borrowers’ identities or the properties with fraudulent loans, The Real Deal found a number of Merchants’ loans were given to affiliates of Moshe Silber and Aron Puretz, who both pleaded guilty last year for submitting fake purchase prices to lenders to secure larger mortgages.
Puretz is serving a five-year prison sentence, and Silber is serving 30 months in prison. They were revealed as part of a Department of Justice and Federal Housing Finance Agency investigation into mortgage fraud, which is expected to nab more investors, TRD reported.
Federal investigators are likely to uncover more mortgage fraud tied to loans at both Freddie Mac and Fannie Mae. After increasing its fund for credit losses by more than $200M to $752M in 2024, the agency said in its annual report that it remained vulnerable to fraud, Bisnow previously reported.
Petrie noted that Merchants saw a 17% reduction in total loan delinquencies and a decline by nearly 60% in the number of loans that were given special mention ratings — or a designation given to loans that may prove problematic in the future.
But lower appraisals also bit into the bank’s earnings. Multifamily prices are up 4% over the past 12 months but down 19% from the market’s peak in 2022, according to Green Street.
Regional banks’ real estate loan books have come under intense scrutiny in the past few years following the downturn in commercial values and failures of major lenders Signature Bank and First Republic Bank.
Federal Reserve economists warned last year that problem loans on banks’ books could destabilize financial markets, but financial institutions have begun modifying and offloading more mortgages on their books, and many have returned to writing new loans as a result.
