Despite headlines, occupancy fraud held steady in Q2, although it remains 'in the top two or three' types
One of the biggest mortgage-related headlines in 2025 has been the rise of mortgage fraud. According to Cotality, fraud is on the rise, although a specific type of fraud making headlines right now held steady in the second quarter.
Cotality released its Q2 fraud report last week. Its National Mortgage Application Fraud Risk Index increased 1.4% from the first quarter and 6.1% year over year. Due to the high-rate environment, the majority of loans being done are purchase loans, which are more susceptible to fraud.
Matt Seguin (pictured top), senior principal of fraud solutions at Cotality, said while multifamily and investment property fraud led the increases, occupancy fraud held steady in Q2.
“Our data, we view as more of a leading indicator, because it's application related,” Seguin told Mortgage Professional America. “A couple of years ago, we were seeing big, big spikes in occupancy fraud. In 2022 quarter two, we were up 30% year over year. In 2023 quarter two, it was up 10.1% year over year. In 2024 quarter two, it actually dropped about 6%. This year, it's down just a little under 1% so we think it's plateaued and started to come down.
“It doesn't mean it's not a really high number and kind of a rampant thing. If you compare it to Fannie’s data they've published, the occupancy jumped for them over that same time period, just a year behind our data.”
Multifamily, investment fraud surging
As was the case in the first quarter, the largest increases in mortgage fraud were seen in the multifamily and investment property segments. The 2- to 4-unit segment shows the highest risk, with 1 in 27 transactions showing fraud indications. This is compared to the overall fraud indicators, which appear in 1 out of 116 total applications.
“But what's really driving the increase that we're seeing is increases in investment properties and two to four units, which are the biggest risk segments that we see in our model,” Seguin said. “The investment fraud seemed to really be driven by like cash-out refinances and investment refinances. As we've seen, even though it's still a small piece of the volume, that piece of the volume has grown pretty rapidly, and so that has driven that index as the main factor.”
Seguin said one of the reasons fraud is so rampant in these product types is that catching it is more difficult than in other areas.
“Both of those, investments and 2- to 4-units, you very well may have property leases involved,” he said. “You could Google today a lease, download it, and fill it out. And it's a pretty hard document to validate. I rented to John Homeowner, and he's paying me $2,000 a month. Some of that in cash, some of it via Zelle, some of it via some other cash app. It’s really hard to track and verify until it appears on a tax return, where you can actually see it and validate it.”
“Then, in a 2- to 4-unit, you could potentially have someone state that it's owner-occupied. They're going to live in one unit, and the other two units are going to be rented out. That's ripe for occupancy fraud. Not many owner-occupants would want to stay in a 2- to 4-unit. It's not impossible, but it's unlikely to happen.”
With both segments, you can also encounter issues with qualification numbers being manipulated to allow borrowers to qualify. This is another factor Seguin said makes this type of fraud hard to catch.
“Sometimes on a purchase transaction, you're using future rental income, and so you know you're qualifying to get over that 50% DTI threshold using that future rental income that the appraiser estimates for you,” he said. “And in some cases, that borrower never rents it out for that dollar amount. Things of that nature that end up really just driving up the risk.”
Occupancy fraud still a problem
Just because other types of fraud have increased, it doesn’t mean that occupancy fraud isn’t a significant problem. It has been in the news lately, as President Trump is attempting to remove Fed governor Lisa Cook due to allegations of mortgage occupancy fraud.
Seguin said this type of fraud is still around, but it hasn’t been growing at the same rate as it was a few years ago. However, part of the reason was that it had reached such a high point that it almost had nowhere to go but down.
“It's still in the top two to three frauds,” he said. “It hasn't been jumping year over year. At some point, it has to plateau or start to decline. The reasons for that are probably really tough to pinpoint. It's probably just reached that precipice where it's gotten so high that it's bound to come down at some point.”
With the FHFA under Bill Pulte highlighting mortgage fraud, Michael Waldron of Gate House Compliance breaks down why scams are more sophisticated than ever—and why brokers still need to trust their gut alongside AI-driven tools.https://t.co/TE6kx8G7H4
— Mortgage Professional America Magazine (@MPAMagazineUS) August 26, 2025
While detection methods have improved, which also limits the amount of occupancy fraud, it remains an ongoing battle between brokers, lenders, servicers, and those committing fraud. Both sides are leveraging AI and other technologies to try to stay ahead.
“Lenders are probably getting better at finding it using fraud tools and detection techniques,” Seguin said. “Fraudsters are usually a step ahead of the people trying to stop the fraud. And then they'll change their techniques and kind of close that loophole. And the fraudsters will go a different angle. Occupancy fraud is still popular, but it hasn't been growing at the same rate as it has in previous years.”
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