With fraud more likely in purchases than refinances, brokers must know their customers well
One of the side effects of elevated mortgage rates has been an increase in mortgage fraud. And while recent data shows that fraud numbers have leveled out over the last two quarters, fraud risk has increased significantly year over year, according to a leading analytics company.
Cotality released its latest National Mortgage Application Fraud Risk Index last week, which showed a 0.3% decrease in Q1 2025 from Q4 2024, but a 7.3% increase year-over-year.
Matt Seguin (pictured top), senior principal, fraud solutions at Cotality, said that higher interest rates have contributed to an increase in fraud risk, especially in transaction risk.
“Rates definitely play a factor in there,” Seguin told Mortgage Professional America. “There are certain areas in the country that are starting to soften and become more of a buyer’s market versus a seller’s market. And sellers have seen, over recent times, ‘Hey, my neighbor got X for their house,’ and now they’re not going to get that.
“That starts driving some actions that maybe are not ethical to try to get those extra dollar amounts. You see those other businesses get in there, LLCs. It’s really just hiding from a lender what’s going on with that transaction and those layers underneath.”
It has made life much more complicated for underwriters, who are trying to investigate every part of a potential mortgage. They’re battling against customers who try to sneak something by them to make a more favorable deal, or even just to qualify.
“They may not know that the realtor is related to the loan officer and to the appraiser,” Seguin said. “There are all these pieces. Maybe it has a gift hidden in there that’s not really from the cousin. There’s a lot of layers to it, and it’s kind of hard for an underwriter on a loan-level basis to identify those.”
Lower rates could equal lower fraud
Seguin noted that typically, mortgage purchase transactions have a higher rate of fraud than mortgage refinances.
“A refi has a 1 in 148 estimated fraud risk,” he said. “Where a purchase is 1 in 104. So, obviously with rates higher, the purchases have been in the 65% to 70% range (of total transactions), with refis making up the difference. That really plays a big part in the fraud risk.”
Even though there will likely be more transactions if mortgage rates drop, as refinances are expected to make up a larger portion of the transactions in a lower-rate environment, fraud is expected to decrease, according to Seguin.
“We do think it will go down with the rate,” Seguin said. “The stats we have here go back to 2010, and refi versus purchase really does play a big factor in fraud risk from a transaction level. As the refis go up, you think about a lot of the government streamlines. FHA and VA have streamlined programs where there’s no income docs, there’s no asset docs, and there’s no purchase contract obviously there.
“There aren’t many docs to commit fraud on. So, in theory, fraud should go down.”
Not only does fewer documents typically equal fewer chances to commit fraud, but lower rates will also result in more deals, meaning unscrupulous brokers and loan officers might be less tempted to commit fraud to meet commission goals.
“Someone doesn’t commit fraud because they have 10 transactions that are legitimate,” he said. “And they don’t have to do that ‘make ends meet that month’ kind of thing to meet commission goals. So, as there are more legitimate transactions in the market due to lower rates, the fraud would decrease based on the historical data that we have.”
Know your customers
Seguin said one of the easiest ways to avoid being taken advantage of by a fraudster is to understand your customers.
“I think it goes back to the old know your customer and know your referral sources,” Seguin said. “A lot of times when you know that something is too good to be true, it probably is.”
Fannie Mae partners with Palantir to fight mortgage fraud using AI, starting with multifamily loans. Bill Pulte highlights the potential to reduce costs and risk, while Priscilla Almodovar emphasizes early fraud detection to protect future loans.https://t.co/dQxDhA5mUm
— Mortgage Professional America Magazine (@MPAMagazineUS) May 29, 2025
He remembers a time as a lender when someone tried to sneak a series of fraudulent transactions through the lender.
“The realtor said, ‘I want to start using you for this program,’” he said. “’I’m going to bring the borrowers. I’ll have all the docs for you and send them to you.’ They delivered it on a silver platter for them. And the lender thought, ‘This is great. This is the best thing ever. I don’t really have to do much.’
“But it turns out the documents had been altered, assuming it was by the realtor.”
While brokers and underwriters can’t catch everything, they are often the first line of defense to keep fraudulent loans from being funded.
“It’s the old trust, but verify kind of thing,” Seguin said. “Try to validate information and double-check things as you’re going through the process. And if something seems off, ask more questions.”
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