As government agencies crack down on fraud, an expert gives tips on where to look
As the federal government looks to crack down on mortgage fraud, one analyst believes that mortgage brokers need to monitor multifamily transactions and occupancy fraud closely. He is pleased to see the increased scrutiny of fraudulent transactions.
Matt Seguin (pictured top), senior principal of fraud solutions at Cotality, views multifamily, specifically two- to four-unit mortgages, as a prime target for mortgage fraud.
“We estimate today 1 in 110 applications have mortgage fraud risk,” Seguin told Mortgage Professional America. “That’s 0.9%, 1%, so it’s still a pretty rare thing. And it’s tough for the lenders, knowing that they’re limited on resources, to know what loan to pull off the conveyor belt to dig into. A two- to four-property is where we think it’s about 1 in 28 applications that have a fraud risk.
“Then you go back to those CBSAs (core-based statistical areas) and the states, and you kind of layer all those pieces together, and it can help a lender decide what loans to pull off the conveyor belt to better use their resources and identify the riskiest applications.”
The data Cotality has supports a recent fraud alert issued by Fannie Mae regarding a mortgage broker and multiple limited liability companies (LLCs) in New Jersey, which involved two- to four-unit single-family investment properties.
“The LLCs record deed transfer documents and approximately 60-180 days after the deed transfer, an individual associated with the LLCs applies for a limited cash-out refinance transaction,” the alert said. “But the individual applying for a loan does not appear on the title. The appraised value of the properties in the refinance transactions are overestimated, allowing the individual to take out more money than the properties were actually worth.”
Seguin wasn’t surprised to see the fraud alert, given both the geography and the loan type.
“It kind of layers in and batches up to the data we have,” he said. “New Jersey is one of our top five states. Two- to four-units is right up there. There are investment properties, and it also involves LLCs, so it fits a lot of those categories. Our data has usually been a predictor of what is coming in the future, and this hit the nail on the head.”
Occupancy fraud still a concern
In addition to issues with multifamily mortgages, Seguin notes that occupancy fraud has also been on the rise over the past couple of years. However, recent trends show it may have begun to level off.
“If you go back and look at some of the historical data, it plateaued in 2024 and maybe started to come down a little bit in the beginning of 2025,” Seguin said. “It’s really tough for lenders. Somebody hasn’t moved, they do a purchase and owner-occupied, and they’re going to move in the day after closing. And it turns out, it gets listed for rent.”
Seguin noted that when Airbnb gained popularity, this type of fraud also increased.
“There was a lot of interest in everyone becoming a landlord,” he said. “Everyone wants those lower rates and higher (loan-to-values) you can get on owner-occupied properties.”
While it’s challenging for the lender or broker who is processing the loan to detect this type of fraud, it's much easier for Fannie Mae and Freddie Mac, who have the opportunity to review the loan after closing to verify occupancy.
“Fannie and Freddie have a big advantage,” Seguin said. “They look at the loan four months after it’s closed. It’s easy to see, ‘Hey, the mailing address has changed,’ and pull reports and find out that it’s been rented and listed for rent on NMLS. The lender doesn’t have that information up front, and could have done everything right, and they are still going to lose if the borrower is untruthful.”
Glad to see action taken
Seguin said that fraud typically occurs one of two ways in the mortgage industry. It is either fraud for profit, usually driven by industry insiders, or fraud for housing, when the borrower typically alters the numbers to make sure they qualify.
“You have fraud for profit and fraud for housing, where it’s probably the old 80-20 rule,” he said. “No one has an exact estimate, but fraud for housing is probably 80% of the fraud, but only 20% of the losses. Where the fraud for profit is only 20% of the time, but it’s probably 80% of the losses. And that’s where you start seeing those trends that really start adding up to big dollar losses for the lender.”
This is where the use of AI technology can help identify trends that could stop fraudulent transactions before they are completed, rather than months later.
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
“It’s harder for an originator to identify one loan at a time,” Seguin said. “You need some tool to come in and say, ‘That loan officer had 20 loans in the last year. They’re all self-employed borrowers. All of them have used the same CPA.’ What are the odds of catching that when you’ve had 10 different underwriters look at those loans?”
That’s why Seguin is glad to see the FHFA looking to use AI tools to identify these patterns earlier in the lending process.
“I’m a proponent for increasing the awareness of it and have loved that recently from the new director (William J. Pulte),” he said. “They brought in Palantir and the tip lines and the hotlines. I think the use of AI can really be an important tool for identifying the trends.”
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