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Illustration: Aïda Amer/Axios

Major banks including Wells Fargo, Deutsche Bank and others have engaged in a pattern of fraud in commercial mortgage-backed securities that is putting the whole market at risk, according to a whistleblower complaint submitted to the SEC, ProPublica reported Friday.

Why it matters: That report was published on the same day as the Fed's financial stability report, which warned the commercial real estate market could be among the hardest-hit industries from the coronavirus pandemic.

The big picture: Should there be a washout in the CMBS market it could have a major impact on the real economy, similar to what happened with mortgage-backed securities in the 2008 global financial crisis, ProPublica notes.

What they're saying: The Fed cited commercial real estate as being particularly susceptible to a major decline in asset prices because “prices were high relative to fundamentals before the pandemic,” and COVID-19 has caused major disruptions in the hospitality and retail industries, "putting the ability of these sectors to make timely mortgage and rental payments into question."

  • Those prices were artificially inflated by the banks, ProPublica reports, citing the SEC complaint, with lenders and securities issuers regularly marking up financial data for commercial properties by as much as 30% “without justification.”
  • The changes "make the properties appear more valuable, and borrowers more creditworthy, than they actually are."
  • "As a result, it alleges, borrowers have qualified for commercial loans they normally would not have, with the investors who bought securities birthed from those loans none the wiser."

Go deeper: Coronavirus is upending the U.S. mortgage market

Go deeper

Dion Rabouin, author of Markets
Aug 18, 2020 - Economy & Business

The American real estate conundrum

Reproduced from CivicScience; Chart: Axios Visuals

The housing market has been a solidly bright spot in the U.S. economy in recent months.

Yes, but: There remain serious questions about what the next phase for the market will be as the coronavirus pandemic has created an enormous amount of uncertainty about where and how people will live.

Collins helps contractor before pro-Susan PAC gets donation

Sen. Susan Collins during her reelection campaign. Photo: Scott Eisen/Getty Images

A PAC backing Sen. Susan Collins in her high-stakes reelection campaign received $150,000 from an entity linked to the wife of a defense contractor whose firm Collins helped land a federal contract, new public records show.

Why it matters: The executive, Martin Kao of Honolulu, leaned heavily on his political connections to boost his business, federal prosecutors say in an ongoing criminal case against him. The donation linked to Kao was veiled until last week.

How cutting GOP corporate cash could backfire

Illustration: Aïda Amer/Axios

Companies pulling back on political donations, particularly to members of Congress who voted against certifying President Biden's election win, could inadvertently push Republicans to embrace their party's rightward fringe.

Why it matters: Scores of corporate PACs have paused, scaled back or entirely abandoned their political giving programs. While designed to distance those companies from events that coincided with this month's deadly siege on the U.S. Capitol, research suggests the moves could actually empower the far-right.