Cotality index shows which states carry the highest fraud risk
Mortgage fraud is something brokers nationwide should be concerned with. However, there are certain states that seem to carry a higher risk of fraud.
Cotality released its latest National Mortgage Application Fraud Risk Index last week, showing the overall fraud risk was slightly higher in Q4 2025 than in the previous quarter.
The index was 133 nationwide, but several states were doing their part to keep that number elevated. New York was the state with the highest fraud index at 260.12, almost double the national index.
Other states and districts with an index of 150 or greater included Florida, New Jersey, Texas, California, Rhode Island, Connecticut, and the District of Columbia.
Matt Seguin (pictured top), senior principal, fraud solutions at Cotality, said there was some connection between higher loan volumes and higher fraud risk, although smaller states like Rhode Island also saw an elevated risk.
“There is definitely some correlation with volume,” Seguin told Mortgage Professional America. “I would say, especially some of the smaller states, like Rhode Island, we've seen a lot of fluctuation there. It's not a huge population, therefore, not a huge amount of mortgages. And when you have smaller numbers, you can skew the data one way or another with a couple of loans.”
The usual suspects
When looking at the states with the highest fraud risk, there is a strong correlation between the highest fraud types and those locations, with multifamily and investment properties leading the way.
“The biggest states we have on there are probably mostly some of the bigger volume states,” Seguin said. “When I think of New York, I think of multifamily properties. Those, to some extent, definitely play a factor. New Jersey is probably similar. Florida's got some rental properties down there, and non-owner-occupied snowbird deals. When you put those two pieces together, some of the geographic risk makes a lot of sense from that angle.”
While there is an elevated risk in areas with higher property values, Seguin also notes that rising costs in property taxes and insurance can also lead to elevated fraud risks.
“A piece that I think ties in, especially in those states, is rising property taxes and insurance,” he said. “If you start thinking about California, Florida, and Texas, they have natural disasters. I've read articles about insurers leaving Florida and California, and rates skyrocketing. So maybe someone goes to refinance who, when they bought the property, was able to qualify.
“But now their insurance is doubled, and their taxes are up 50%, and now they can't break the 50% DTI threshold. Now you have some other kind of external motivations that could lead to fraud.”
Knowing your customer
One way to help reduce fraud risk is to really know and understand your customer. If you understand their situation thoroughly, it can help reduce the risk that the transaction is fraudulent.
While Seguin doesn’t have data showing whether local brokers have an advantage with their area knowledge, he admits it may be easier for those brokers than for the ones who broker all over the country.
“If you have breakfast with a buddy at the diner constantly, and you get a mortgage for him, the fraud is less likely in that scenario than if somebody is just applying online,” he said. “You've never met, and you are in a different state that you don't know. Maybe you don't know the risks of it, or maybe it's a purchase, and you don't know the borrower is the sister of the realtor.”
The biggest challenge for brokers and lenders is to try to spot pattern fraud, and this is an area where Seguin believes that watch lists can play a huge role in helping.
“Almost every investor has a watch list of some sort,” Seguin said. “I think where those end up providing maybe some value is that the schemes that they're really trying to protect against are pattern fraud. Those are a lot tougher for an underwriter to recognize on a one-off basis. It’s the appraiser who inflated values on 10 properties or things of that nature. So that's why I think there is some value in those watch lists.”
Seguin would like to see some standardization in the watch lists to make them easier for brokers and lenders to use.
“They’re really challenging for lenders to administer, because they come in all different formats,” he said. “If there were a standardized format, it'd be easier. Also, most lenders keep them under lock and key. They don't want to share them because there's some reputational risk. It's definitely a challenge in that regard. I think the pattern fraud is like the really big problem.”
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