A purchase-heavy market raised mortgage fraud risk in the second quarter, with the distribution of applications opening the door for unlawful activity, a new report said.
Fraud risk increased by 9.1% quarter to quarter, according to real estate data provider Cotality. The company's fraud risk index jumped 11 points to a reading of 132, with one in every 119 mortgage applications containing a potential lending defect or flaw. The index
Compared with the same three months in 2025, though, the index declined 4.6% from the 138 mark, Cotality said.
An economic environment that has run counter to expectations this year is behind much of the index rise, according to Matt Seguin, senior principal at Cotality mortgage fraud solutions.
"The Q2 data is very interesting as the rate cuts everyone was hoping for didn't materialize," he said.
Instead,
Total application numbers in the second quarter skewed heavily toward purchases as a result, with a 72% share, compared to 28% for refis by Cotality's measure. In the previous quarter, purchases had accounted for just 59%. The expansion of the purchase-application share came at the same time overall applications also increased 5.2%.
Purchase transactions typically carry greater fraud risk than refinances, Seguin pointed out.
"Some of the government refinance streamline programs may not require income or asset and appraisal docs; therefore, the opportunity to commit fraud is lower. Purchase loans are the opposite and generally require those documents, which leads to more opportunities for mortgage fraud," he said.
Refinances typically do not require additional documentation because of information on file.
How investor transactions elevate risk
In the second quarter, Cotality's data showed the highest probability lying in the investment and multifamily loan segments. One in every 44 investment applications had a sign of possible fraud. In multifamily lending, the potential was even higher at one in 27.
The single index category that increased on a year-over-year basis also points to the likelihood for fraudulent activity on the part of investors. Risk from undisclosed real estate rose 2.6%, with the failure to note ownership of other properties possibly hiding from lenders the existence of liens, occupancy misrepresentation, foreclosures and other adverse credit events.
Undisclosed real estate is 2.5 times more likely to be linked to an investment property than an owner-occupied unit, Cotality said.
In an analysis of general predictive risk alerts, three types stood out for recent upward-trending frequency, the company said. All have connections to potential investor fraud: transaction, property and occupancy.
- Transaction alerts are sent when borrowers purchase a unit in a new state at a lower value than what they may have previously owned.
- Property notifications occur to signal a possible fraudulent fix-and-flip transaction coming from a borrower who had a prior sale in the previous 12 months.
- Occupancy red flags emerge when a first-time buyer application arrives from someone suspected of being an existing real estate owner. They also appear in applications for second homes coming from a borrower for a unit located near their primary residence.
