Months after major debt brokerage Meridian Capital Group was effectively blacklisted by Fannie Mae and Freddie Mac, the company is making changes to move the company forward. Chief among the changes is replacing key leadership positions at the company and adding stronger protocols and controls to ensure the accuracy of clients' financials. It is unclear how long the investigation into Meridian will last, but the strategy going forward is clearly focused on avoiding future investigations.
Meridian's troubles began last fall when news broke that Freddie Mac, a large multifamily lender, was investigating Meridian Capital Group over one of the transactions it did for the company. According to published reports, the investigation focused on certain lending information related to a Meridian broker, who was placed on administrative leave while the investigation was ongoing. The broker was also barred from transacting through Freddie Mac lenders for the duration of the investigation. This was a major blow for Meridian, one of the largest commercial mortgage brokers in the country. In 2022, the company was named the top lender for Fannie Mae and Freddie Mac by Commercial Observer for the seventh consecutive year.
Meridian was founded in 1991 and grew to become a top player in commercial real estate finance by adding investment sales and retail leasing divisions. In 2018, the same year the company launched its retail leasing platform, Meridian was named the top commercial real estate debt broker in New York City by The Real Deal magazine, originating $15.2 billion in 1,657 loans in 2017. The company's rapid growth was driven by its multifamily mortgage business, with the runner-up having originated $5.8 billion in 15 transactions. In early 2021, Meridian announced a new partnership with global investment management firm Barings, in which Meridian acquired the assets and liabilities of affiliate Barings Multifamily Capital. In this new venture, the two companies worked together to create an origination platform called Newpoint Real Estate Capital. The new platform was to be led by David Brickman, who had been promoted from his position as CEO of Freddie Mac to become CEO of Newpoint.
Fast forward to 2023 and Meridian was performing well. Meridian brokers had recently arranged financing for Empire Capital & Partners' $320 million acquisition of 1330 Sixth Avenue, an office tower in midtown Manhattan. Meridian still recorded strong deal numbers despite a series of layoffs in the spring, which reportedly involved 5% of employees being fired, mostly from its debt and investment sales teams. But in November, Freddie Mac began investigating the firm over allegations that Meridian brokers had falsified clients' financials to obtain larger loans. It was a shock to many in the industry, given that Freddie Mac's former CEO had left the firm just a few years earlier to join Meridian's new Barings platform. (Brickman left Meridian around the time the investigation became public.)
Meridian is not alone in being investigated. Fannie, Freddie and federal housing regulators are reportedly conducting a broader investigation into the commercial mortgage market. In April of this year, as the investigation into Meridian continued, Freddie Mac announced a new set of rules to root out fraud. The guidelines update rules on mortgage transactions, increase the number of unit inspections for multifamily housing funded by Freddie Mac and require additional documentation to verify tenants' rent payments. The new policies were included in a new Multifamily Seller/Servicer Guide that the government-sponsored agency released two months ago.
Meridian has long marketed itself as a high-volume firm. The company touts itself as “America's most active dealmaker” on its website and other marketing materials. But the long-term effects of the pandemic and the tough economic environment have led to a significant decline in transaction volume. Meridian hired many brokers to focus on volume, and when the market slowed, layoffs followed. Additionally, Freddie Mac's investigation of the firm last fall was a major blow to the firm, given Meridian's strength in refinancing transactions with small building owners. With Freddie and Fannie suspending transactions with Meridian while the investigation continues, the broker has been forced to focus on other areas of its business to survive.
As part of the new strategy, Meridian is hiring new leaders to tighten controls within the company. In April, Meridian named Brian Brooks as its new chairman and CEO. Brooks, who previously served as the acting comptroller of the currency, replaced Hertzka, who remained Meridian's co-founder and senior chairman. He told The Wall Street Journal that under his direction, guardrails and protocols to ensure accurate financials will be strengthened, he will not tolerate any shortcuts, and “we will cut brokers who cut corners.” The company's latest hire is the naming of Melissa Martinez as Meridian's first chief risk officer. Martinez, who previously worked for real estate data services provider CoreLogic, will start at the company this month. “When you think about the mortgage broker industry today, there really are no standards,” Martinez said. “This will be the first risk management capability that will be launched within the industry.” The new leaders have experience rescuing struggling companies. Both Martinez and Brooks were part of the team that took over IndyMac, a California bank that collapsed during the 2008 financial crisis, and that team included former Treasury Secretary Steven Mnuchin.
Meridian is still dealing with fallout from the Freddie Mac investigation, even as it seeks to strengthen the firm with new leadership and a tighter framework of processes to avoid risk. Earlier this month, the firm fired a broker in its New Jersey office, saying in a statement that the move would make the firm “leaner and more efficient.” Hertzka, who holds another position at Meridian, sounded optimistic at a real estate event in New Jersey in April this year. While acknowledging that the firm is going through difficult times, he said that Meridian's business remains strong, closing $4 billion in new deals with about 100 lenders nationwide in the first quarter. As of late June, Meridian's social media was abuzz with frequent updates about new deals it had closed and retail space available for lease. With new leadership focused on tightening protocols and minimizing risk, the brokerage firm aims to keep its business solid, no matter how long the investigation lasts.