Mortgage Fraud Risk Rises for Second Consecutive Quarter

Mortgage fraud is increasing across the United States, according to the latest data from the Cotality Mortgage Application Fraud Risk Index. The index reported a 6.1% rise from the second quarter of 2024 and a 1.4% increase from the first quarter of 2025, signaling a continuing upward trend in potentially fraudulent activity in the housing finance market.

Investment and Multi-Unit Properties Drive Risk

Cotality highlighted investment properties and multi-unit properties as the riskiest segments of the mortgage market. Within the 2- to 4-unit property category, about 1 in 27 transactions exhibited signs of fraud, despite a slight 2% year-over-year reduction in risk for this segment. Application volumes in this sector have risen sharply, up 43% since Q2 2024, reflecting both increased market activity and heightened vulnerability to fraudulent behavior.

In contrast, VA-backed applications remained the lowest-risk category, consistent with historical patterns, providing some reassurance for government-insured lending programs.

Overall, Cotality estimates that 0.86% of all mortgage applications now contain potential fraud risk—roughly 1 in 116 applications up from 0.81% (1 in 123) during the same period last year.

Breakdown by Fraud Type

The index measures a variety of fraud categories, showing mixed trends:

• Identity fraud: +0.4% YoY
• Transaction fraud: +6.2% YoY
• Property fraud: +1.5% YoY
• Income fraud: +2.1% YoY
• Occupancy fraud: -0.9% YoY
• Undisclosed real estate debt: +12% YoY

Cotality notes that the surge in undisclosed debt and transaction fraud is contributing significantly to the overall increase in risk, highlighting the need for heightened scrutiny in mortgage underwriting.

National Trends

While purchase transactions still account for the majority of mortgage activity at 70.9%, down from 74% a year ago, refinance fraud risk is growing faster, rising 22% year over year. The heightened risk in refinances is primarily driven by multifamily properties, cash-out refinances, and investment loans.

Multifamily loans remain the highest-risk segment overall, although they saw a modest 2% decrease in risk the first decline in this category since 2020.

Other risk shifts include:

• Increases: Refinances (+22%), investment properties (+18%), purchase loans (+5%)
• Decreases: Jumbo loans (-7%), multifamily (-2%), VA loans (-2%)
• Stable: FHA loans

State-Level Insights

Certain states continue to show elevated fraud risk, with some notable changes:

New York: Tops the list, driven by a 57% increase in undisclosed debt risk, a 30% increase in transaction risk, and a 21% rise in occupancy risk, resulting in an 11.5% overall increase YoY.

Rhode Island: Surpassed Florida in overall risk, with undisclosed debt risk rising 27.1% and total risk up 23.5%.

Florida: Property fraud increased 24.6%, and undisclosed debt risk rose 9.3%, pushing overall risk 16% higher.

California: Property and debt risks increased modestly, but overall state risk declined slightly (<1%).

Connecticut: Total fraud risk fell 3.1%, though undisclosed debt and occupancy risks increased 25.4% and 22.3%, respectively.

Market Volatility Fuels Fraud

According to Matt Seguin, Senior Principal at Cotality, the rise in fraud risk is closely linked to the volatility in the housing market over the past year.

“Interest rate cuts haven’t happened as rapidly as many expected, keeping purchase activity high. Purchase transactions historically carry higher fraud risk, and because they still make up nearly 70% of applications, the overall risk level remains elevated,” Seguin said.

The combination of rising investment activity, slower-than-expected interest rate relief, and elevated multi-unit property transactions suggests that mortgage lenders must maintain heightened vigilance and strengthen anti-fraud measures to protect both themselves and borrowers. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.