The risk for mortgage fraud in loan applications decreased 9% on both a quarter-to-quarter and annual basis but problems remain with submissions for both investor and multifamily properties, Cotality said.
The first quarter ended with approximately 1-in-129 mortgage applications having some indicator of fraud, putting the Cotality National Mortgage Fraud Application Risk Index at 121 for the period. This compared with 133 for the fourth and
This is the best performing quarter since the second quarter of 2023, when the index was at 116.5.
In the fourth quarter, an estimated 1-in-118 mortgage applications contained a fraud indicator.
Findings in
Fraud risk in investment property applications
The data found 1-in-44 applications secured by investment properties had indicators of fraud; for multifamily, the rate was even higher at 1-in-29.
This is coming as the surge in investor and multifamily loan volume plateaued and the share began to decrease in the first quarter to 12% of volume from 13.4% three months' prior, said Matt Seguin, Cotality Mortgage Fraud senior principal, in a press release.
"Lenders should remain diligent on fraud reviews, especially around investor and multi-unit homes as the underlying data does continue to show some risk there even with an overall decreasing fraud index," Seguin warned.
Most fraud risk categories declined year-over-year. But, besides undisclosed real estate, Cotality found increases in inflated property values and transaction fraud risk quarter-over-quarter, to 1.4% and 7.1% respectively, Seguin added.
Undisclosed real estate defects increased 7.7%, and these alerts are 2.5 times more likely to come from those seeking a loan on an investment property than from an owner-occupied one.
If an applicant is found to have undisclosed real estate, it is likely they have undisclosed debt, are making a possible occupancy misrepresentation and/or have one or more derogatory credit events which are also being hidden from the lender.
Occupancy fraud risk indicators
When it came to occupancy, the report found an increase in alerts signifying a primary or second home (in this case it would be
Cotality did notice an increase in alerts related to a borrower having a high income relative to their age.
Application defect rate declines in fourth quarter
Separately, Aces Quality Management released its fourth quarter and full year Mortgage QC Industry Trends Report, noting critical defect levels fell nearly 23% following three quarters of increases.
The fourth quarter critical defect rate of 1.38% compared with 1.79% in the third quarter and
For all of 2025, the rate was 1.5%, 2 basis points lower than for 2024. Aces uses the Fannie Mae defect taxonomy in its classifications.
"Lenders ended 2025 on a strong note, with Q4 delivering a meaningful drop in the critical defect rate and the full-year average holding essentially flat versus 2024," said Nick Volpe, executive vice president at Aces Quality Management, in a press release. "But the year's defining shift toward eligibility-driven defects as refinance activity returned indicates that disciplined documentation and consistent eligibility decisioning will define quality in 2026."
Eligibility-related defects up nearly 300% year-over-year
Legal, regulatory and compliance issues was the No. 1 defect category, with a 24.66% share, up 30% from 18.97% three months prior. It traded places with income/employment, which fell to 21% from 21.52%.
For the full calendar year, defects related to borrower eligibility climbed 291.58% over 2024, while credit rose 166.13%. This is a migration toward eligibility-driven defects as borrowers were stretched to qualify for a loan in a constrained affordability environment, Aces said.
