Cotality data: Mortgage fraud up from Q3 and year over year
Mortgage fraud remained a major story in the industry in 2025, driven by high-profile court cases and organizations focused on identifying fraudsters. It will likely remain a major story in the new year as well.
Cotality released its latest National Mortgage Application Fraud Risk Index on Thursday, revealing that fraud increased in the fourth quarter of 2025 compared with both the previous quarter and the same period in 2024.
The index was 133 at the end of Q4, up from 131 in Q4 2024. This translates to 1 in 118 applications having indications of fraud.
Matt Seguin (pictured top), senior principal, fraud solutions at Cotality, said an increase in investment property loans was the primary cause of the fraud risk bump. A surge in debt service coverage ratio (DSCR) loans was one of the major factors contributing to the increase in fraud risk.
“We saw the volume year over year really increase on investment properties in 2-to-4 units,” Seguin told Mortgage Professional America. “Investments and multifamily are the two riskiest parts of the segment. That's why the index is still going up. I started thinking about why those are going up so much. The conclusion I've really reached is a few things. DSCR has become very common, with more and more lenders starting to use that program.
“I think a real challenge is that a lot of those borrowers are entities. It goes back to the know your customer. Who's really the ownership, and who owns that company? You have potentially undisclosed conflicts of interest and things of that nature that aren't as easy to identify as when you have a natural person as a borrower.”
Two sectors lead the way
As was the case last quarter, two mortgage sectors continue to account for the largest increase in fraud cases. The investment and multifamily spaces remain problematic. Cotality estimates that 1 in 43 investment applications has indications of fraud risk.
It’s more prevalent in the multifamily space, where an estimated 1 in 27 applications has indications of fraud.
The application volume in these two sectors has increased compared with the previous year, increasing fraud risk. Investment property applications are up 34%, while multifamily properties are up 50%.
Seguin cited the popularity of fix-and-flip programs on television and online has led to a surge in homeowners wanting to get into investment properties.
“You go on HGTV, and you can watch fix-and-flip shows, and you scroll through your social media, and it's cool to be an investor and a landlord, and everyone wants to do it,” Seguin said. “That seems to really be driving that interest in the investment 2-to-4 unit program.”
Real estate fraud risk had the largest increase from the previous year at 8.6%. Non-owner-occupied homes triggered undisclosed real estate alerts more than 2.5 times as often as owner-occupied homes, according to the report.
Undisclosed real estate fraud may also be linked to undisclosed debt, occupancy fraud, and derogatory credit events being hidden from the lender. Seguin said it’s very hard for brokers and lenders to catch at the beginning of the process.
“It makes sense if someone owns an investment property, more than likely they own more than one property at a higher rate than somebody who is doing just a primary residence,” Seguin said. “That also gets into the two loans at the same time, going to two different lenders, and they don't know about it, kind of thing. Six months down the line, Fannie Mae calls it out. And that's challenging for lenders to watch for and know when those are happening.”
Refinances increased by 19% year-over-year, which helped to keep the increase in fraud risk a bit lower. Refis traditionally have a lower risk of fraud, which then lowers the fraud index, according to Seguin.
“The most interesting part of the data is we saw refinances go up year over year, and historically, the refinances drive the index lower,” he said. “The opportunity (for fraud) is not there. They generally don't have income docs. They generally don't have assets and appraisals. There's not much left to alter at that point.”
Risk categories to monitor
While several fraud risk categories decreased, each had a fraud type that appeared on Cotality’s radar in Q4.
The first is income, with an increase in alerts related to employer information that couldn’t be verified by phone or address.
The second is property, with the greatest risk due to the subject property's possible flipping and inflated value. The properties in question had transferred ownership and had gains of 100% or greater in the last 24 months.
Occupancy fraud is the final type, involving a primary or secondary residence that is not occupied as disclosed. This type of fraud has been in the news because of the case involving Federal Reserve governor Lisa Cook, who has been accused of occupancy fraud. The Supreme Court is hearing a case about whether President Donald Trump can fire Cook.
“Across the board, those categories all dropped, but there are specific alerts which we have that are very high quality in recognizing fraud based on historical data that we have,” Seguin said. “In the income alert, that one went up a decent amount, but it's still within the overall decrease of income fraud. Occupancy is an interesting one because we started talking about it last year. Our data shows that occupancy fraud peaked in late 2024 or early 2025. It has slowly started decreasing since then.”
Seguin credits improved diligence by brokers and lenders as one reason these types of fraud have been on the decline.
“I think that's a lot of it,” he said. “It's better diligence. And as the GSEs or FHFA push it down and bring it to light, it forces lenders to be more diligent about occupancy and income.”
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