The mortgage fraud scam exposing broader cracks in small-time commercial lending

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Norman Fuchs inked the deal of a lifetime. 

In Cincinnati in 2019, Fuchs bought a sprawling, nearly 1,000-unit rental complex for $70 million and flipped it for a 30 percent profit a week later. 

But Fuchs never saw the money. In fact, he had zero involvement in the deal. 

The fast, profitable flip was evidence of a bigger scheme, a crack in the system quickly expanding into a giant loophole. It started with small-time landlords looking for easy cash and spiraled into nearly every part of the real estate ecosystem: title insurers, brokers, appraisers and possibly lenders, who knew more than they are letting on. The Department of Justice and the Federal Housing Finance Agency are running investigations. 

What actually happened was that three investors — Boruch Drillman, Fred Schulman and Mark Silber — had allegedly stolen Fuchs’ identity, forged his signature and bought the apartments for $70 million. Then the fake Fuchs flipped them to the real Drillman for $96 million, according to the Department of Justice.

With the higher price, Drillman was able to score a $74 million loan from JLL, meaning the investors were putting in essentially no money of their own, since the loan and actual purchase price were close to the same amount. The JLL loan was quickly offloaded to Fannie Mae. 

It wasn’t an isolated scam

Savvy real estate investing relies on loopholes. Every sophisticated developer maximizes depreciation benefits or 1031 exchanges. 

Other loopholes foster perfect conditions for fraud, industry sources say. 

In deals like Drillman’s, owners could “self-certify” rental income: Property owners tell lenders, “trust us.” These loans were then sold to Fannie Mae or Freddie Mac. Lenders often rely on title insurers to report a flip, but — critically — title companies have no legal requirement to do so. 

Apartment owners could also fail to note bad debt, such as unpaid rent, in loan applications. To be sure, the agencies mandated other safeguards. Freddie Mac required audits and inspections on apartment units. But in-person inspections were halted during Covid, and some owners found workarounds.

Congress established Fannie and Freddie, which are quasi-public entities, to provide liquidity to the market by guaranteeing payments on certain loans in the event of default. Fannie alone provided more than $52 billion in financing to the multifamily sector last year. 

Now the agencies suspect some of the loans they purchased are fraudulent, meaning that the public is not just subsidizing Drillman’s zero-equity, 30-percent-upside flip in Cincinnati, but also giving lenders every incentive to make risky loans, knowing they won’t be on their books for long. 

To date, Fannie has stopped closing loans with two of the largest title insurers in the tri-state area, Madison Title and Riverside Abstract, which closed the loans in Drillman’s fraudulent deals. Freddie has launched an investigation into Meridian Capital Group, a brokerage with over 500 employees, over allegations that some brokers falsified information to obtain larger loans. 

(Meridian, Madison and Riverside have not been charged with any wrongdoing).

Drillman pleaded guilty and is awaiting sentencing. 

More guilty pleas are set to come.

The scale of this fraud is still unclear, in part because there is community pressure for all involved to stay mum, but investigations could net big, known players, not just little guys. One thing is certain: For midmarket buyers, tweaking deals was easy, easier than a lot of consumer transactions. 

The game

During the boom of 2019, lenders were all too willing to lend. Interest rates were low, rental growth was exploding, valuations kept rising. Even if an owner defaulted, the value of the real estate asset would exceed the loan. Lenders could sell their loans to Fannie and Freddie, an additional hedge.

A review of the DOJ’s pending cases shows two common ways in which borrowers deceived lenders. One way was to manipulate expenses and income to increase the size of their loan. Another was to flip properties between related parties, while concealing it from lenders.

One up-and-comer in Detroit’s real estate scene, Tyler Ross of ROCO Real Estate, recently pleaded guilty to providing false information to lenders tied to a $500 million multifamily portfolio eventually sold to the Chetrit Group. Ross allegedly reduced expenses, including contractor, marketing and management fees, to make the building appear profitable, and omitted rent concessions given to certain tenants. He then sent these bogus numbers to his lender, according to the DOJ. 

“Those who willfully provide false financial information limit the amount of money that is available for individuals and companies who are doing the right thing,” said Shawn Rice, special agent in charge at the Department of Housing and Urban Development Office of Inspector General. 

Mordichai Weiss, an investor based in Monsey, New York, is another reported target for the DOJ. Weiss’s affiliated companies obtained seven loans from Fannie or Freddie to buy 11 apartment complexes. On some, he used the flip technique to land loans worth more than the properties. Now nine of Weiss’s properties have faced foreclosures, according to Commercial Mortgage Alert. Fannie has already bought back six loans on Weiss’s properties, the publication reported. Weiss has not been charged yet.

In at least one case, a landlord staged apartment units to fool inspectors, the DOJ says. Jacob Deutsch allegedly moved furniture into vacant units in Hartford, Connecticut, and instructed employees to tell inspectors they lived there. Deutsch then sent a rent roll to CBRE claiming that the property was fully occupied, when no one lived there, the department alleges.

For the whole thing to work, an alleged perpetrator often needs a title insurer to sign off on the closings. Drillman used the same title companies for both sales. After a property flips, a borrower can use the higher sales price to obtain a larger loan and pocket the loan proceeds.  

The brokers

In an Italian wedding venue in suburban New Jersey across the street from a used car dealership, Meridian Chair Ralph Herzka was given a standing ovation for his speech.

His firm was facing the greatest threat in its nearly 32-year history. Herzka was there for a real estate gathering.

In between a borrower and a lender, there is usually a debt broker, someone who fosters relationships and helps arrange financing.

Meridian started doing this for New York City’s Orthodox Jewish building owners in the 1990s. Over the last five years, the company arranged $136 billion in financing for multifamily owners nationwide.

Fannie and Freddie bought a lot of the loans Meridian arranged. But last November, news broke that the pair were investigating Meridian over whether brokers worked with borrowers to manipulate loan documents on a New Jersey apartment complex. Meridian employees were not just fostering relationships or crafting stories, the investigators allege, but were also intentionally altering paperwork they sent to lenders.

If Fannie and Freddie find that Meridian brokers routinely altered loan documents, they might never work with the brokerage again. They have permanently banned individual Meridian brokers. 

A lifetime ban from the agencies would help confirm that the New Jersey rental incident is not isolated. It would also be catastrophic for Meridian. 

Meridian cultivated ties to the agencies. A decade ago, Herzka co-founded a Fannie and Freddie servicer and sold it to Capital One. The firm had also invested in a multifamily lending platform led by former Freddie CEO David Brickman

“Those who willfully provide false financial information limit the amount of money that is available for individuals and companies who are doing the right thing.”
Shawn Rice, special agent in charge at the Department of Housing and Urban Development Office of Inspector General

If Meridian was on the brink, Herzka didn’t show it at the event. Amid its recent trouble, Meridian had moved Herzka to a role as chair, tapping a former general counsel of Fannie as its CEO. Now, Herzka told tales about kosher dinners with the late Charlie Munger and lessons from the Talmud. He never mentioned the investigation directly.

“These are challenges we face as a person,” said Herzka. “Our whole challenge is to realize that it’s the same G-d that gave us all the blessings, gave us some challenges. As long as we can accept it in that way, it makes it easy.”

In the community, Herzka is a revered figure. A prolific donor to Jewish philanthropies, he’s been referred to as a “baal tzedakah,” a master of charity, by the Lakewood Scoop

At Meridian, Herzka was known as a hard-driving boss. 

His firm’s motto was “Eat. Sleep. Close. Repeat.” Under Herzka’s leadership, Meridian arranged more than $550 billion in financing for more than 11,000 customers and consistently ranked among the largest brokerages by transaction count. Even 30 years in, a lot of that funding went to small deals.

For now, the investigations into fraudulent loans likewise appear to be focusing on smaller, more obscure players. 

The owners

Boruch Elchonon Drillman dropped out of Brooklyn’s hasidic yeshiva system in the 10th grade and ventured into real estate. By age 36, he had invested in over 20 properties, spanning office, industrial and multifamily. 

He considered himself an entrepreneur, but others called him a slumlord. Tenants alleged that he did not take care of his buildings. On Christmas Day 2022, a water line burst at Drillman’s Columbus, Ohio, rental complex, leading to a mass evacuation and lawsuits, and later a $1.5 million settlement over the flooding damage. 

Drillman appeared in an Ohio courthouse and deflected blame to the building’s management company.

“If you ask me what I think about these people, I think they are terrible,” said Drillman at the hearing in 2023. 

But Drillman had other problems. He had teamed up with Silber and Schulman, who ran an affordable housing firm and a community bank in Westchester County, to buy another complex, the Williamsburg at Cincinnati.

There, the alleged scheme relied on loopholes — none illegal — and a broken system. 

One element involved a roundabout solution to a paperwork problem that resulted from doing the flip. Property records showing two sales within a week, at such a sharp difference in price, would set off red flags for lenders. To keep the deal out of the records, Drillman and his partners bought shares in a company controlling the property. By acquiring these shares, Drillman and his partners effectively became the owners. 

This flip was allegedly never disclosed to their lender or Fannie Mae. Again — while lenders tend to look to title insurers to flag flips, title companies do not have a legal requirement to report them. 

The DOJ alleges that Drillman ran a similar scheme in Michigan a year later. There, he partnered with the father-son team of Aron Puretz and Eli Puretz to buy an innocuous office complex for $42.7 million. That purchase was flipped for $70 million back to Drillman and the Puretzes. Riverside Abstract, a title insurer, performed both closings. 

Here is where the game gets fuzzy. To the operators, the buildings were cash cows, not physical assets. Drillman had only seen the Columbus site once before purchasing it in 2021, he said in court. The approach left hundreds of tenants in the Ohio cities living in squalor. 

The victims

At Drillman’s property in Cincinnati, tenants were left without heat. In Columbus, asbestos was found in units.

This happened again and again: dismal conditions and fraudulent financial dealings went hand in hand.

Properties owned by entities tied to Aron Puretz, Drillman’s alleged co-conspirator, and his brother Chaim are full of tenant complaints. A Philadelphia senior living center had 95 open code violations. A Richmond, Virginia, housing complex was left unheated at times and sewage leaked onto the ground outside, according to news reports. 

Meanwhile, in Chicago, HUD found that a Puretz rental building had 34 units with widespread or extreme water damage.  

It’s too simple to leap through the loopholes to become a slumlord, the drumbeat of cases shows, and too profitable.

In April, Freddie Mac increased inspections at buildings backed by its loans, according to new guidelines. It will require more documentation for audits and more due diligence for first-time multifamily borrowers.

On the federal level, the DOJ continues to prosecute fraudulent and negligent operators. Suspensions continue at Freddie and Fannie. Meridian is brokering non-agency deals. Drillman, now slimmer thanks to Ozempic, awaits sentencing.

Closing the loopholes won’t be an easy job. There’s a lot of money at stake, and a lot of people willing to tolerate the risk of getting involved at one level of the scheme, to buy the building for a partner or flip the building in a week or sign the title insurance paperwork or market the loan — to exploit any loophole you can imagine and some that you can’t.