Mortgage fraud is on the rise, according to the Cotality Mortgage Application Fraud Risk Index.
The index increased 6.1% from the second quarter of 2024 and was up 1.4% from the first quarter of the year.
Volumes have markedly increased in investment property and multi-unit property fraud, which Cotality calls the two riskiest sectors that it measures. The 2- to 4-unit segment had the highest risk (even when accounting for a risk decrease of 2% year over year), with about 1 in 27 transactions showing indications of fraud. The volume of these applications rose by 43 percent since the second quarter of 2024. VA-backed applications remain the lowest-risk category, consistent with prior years.
Cotality estimated that 0.86% of all mortgage applications contained fraud risk, or about 1 in 116 applications, compared with 0.81% (1 in 123) in the same year-ago period.
The different risks measured by the index include:
- Identity fraud, up .4% from the second quarter of 2024
- Transaction fraud, up 6.2%
- Property fraud, up 1.5%
- Income fraud, up 2.1%
- Occupancy fraud, down .9%
- Undisclosed real estate debt, up 12%
Among national fraud trends:
- Purchase transactions fell from 74% of overall volume in the same period a year ago to 70.9% in the most recent report. Cotality noted that purchase transactions still carry a higher risk than refinances, but refinance fraud risk rose 22% year over year compared with a 5% increase for purchases, which Cotality attributed to riskier loan types such as multifamily, cash-out, and investment refinances.
- Multifamily loans remained the highest-risk segment, though their risk dropped 2% year over year, the first decline since 2020.
- Risk increased in refinances (22%), investment properties (18%), and purchases (5%). It declined in jumbo loans (7%), multifamily loans (2%), and VA loans (2%). FHA loans remained flat.
The states of New York and Rhode Island had mortgage application fraud risk. New York has been first or second for the past four years, while Rhode Island pushed Florida to third. “Rhode Island’s smaller market size magnifies changes in application volume, which can disproportionately influence risk levels,” Cotality said in a press release.
Among other state highlights:
- New York: Top ranking driven by a 57% increase in undisclosed real estate debt risk, a 30% increase in transaction risk, and a 21% increase in occupancy risk. Overall risk rose 11.5% year over year.
- Rhode Island: Undisclosed real estate debt risk increased 27.1%, with overall risk up 23.5%.
- Florida: Property risk rose 24.6% and undisclosed real estate debt risk increased 9.3%, pushing overall risk up 16%.
- California: Undisclosed real estate debt risk increased 20.7% and property risk rose 11.8%. Overall state risk declined slightly, down less than 1%.
- Connecticut: Overall risk decreased 3.1%, but undisclosed real estate debt risk rose 25.4% and occupancy risk increased 22.3%.
“The increase in the fraud risk can partly be attributed to the volatility starting to be seen in the real estate market,” said Matt Seguin, Cotality senior principal, fraud solutions. “Interest rate cuts haven’t come at the rate expected over the last year, so purchase transactions, which historically speaking have higher fraud risk, continue to represent almost 70 percent of the applications seen by Cotality.”
