Mortgage application fraud risk declined in the first quarter of 2026, returning to historic norms as refinancing activity increased, according to a new report from Cotality.
The company’s Q1 2026 National Mortgage Application Fraud Risk Index fell 9.3% from a year earlier and 9% from the fourth quarter of 2025. Cotality estimated that about one in every 129 mortgage applications showed indications of fraud risk during the quarter.
The decline comes as refinancing activity accounted for 41% of mortgage applications in the first quarter, while purchase loans made up 59%.
Despite the overall improvement, Cotality found that the undisclosed real estate category posted the only year-over-year increase among major fraud risk indicators, rising 7.7%. The category can signal hidden debt, occupancy misrepresentation or undisclosed derogatory credit events, such as foreclosures, notices of default or short sales.
The increase appears to be tied to a greater concentration of investment property applications, according to the report. Historically, undisclosed real estate alerts are 2.5 times more likely to occur on investment properties than on owner-occupied homes.
Investment and multifamily properties continued to carry the highest fraud risk. Cotality estimated that one in 44 investment property applications and one in 29 multifamily applications showed indications of fraud, compared with the overall industry average of one in 129.
“We saw that surge of investor volume from last year plateau and begin to decrease in Q1 2026 as an overall portion of the applications. In Q4 2025, investment and multi-unit represented 13.4% of applications but that dropped to 12% in Q1 2026, roughly an 11% decrease,“ Matt Seguin, senior principal for Cotality Mortgage Fraud Solutions, said in a statement.
Seguin said lenders should remain vigilant when reviewing loans tied to investment and multifamily properties as underlying risk indicators remain elevated despite the overall decline in fraud risk.
He also noted that property fraud risk, which can include inflated property values, rose 1.4% from the fourth quarter, while transaction fraud risk increased 7.1% on a quarterly basis.
The company said that overall mortgage applications increased 6.7% from Q4 2025 to Q1 2026. Government loans backed by the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture accounted for 23% of all applications, down slightly from the prior quarter.
Cotality also identified growing risk trends between January and March in income, property and occupancy categories.
Income-related alerts increased for borrowers whose reported income appeared unusually high relative to their age. Property-related alerts rose for homes that may have been recently flipped, and for transactions involving sellers structured as corporations or limited liability companies.
Occupancy-related alerts also increased, including instances in which borrowers may have misrepresented whether a property would serve as a primary residence or second home.
Among states, New York ranked as the riskiest market for mortgage fraud in the first quarter, followed by Florida, Connecticut, New Jersey and California. Fraud risk increased from the previous quarter in New York, Florida and Connecticut, while it declined in New Jersey and California.
The index is based on residential mortgage applications processed through Cotality’s LoanSafe Fraud Manager platform, which uses predictive analytics to assess fraud risk. The report tracks six major categories of fraud indicators: identity, income, occupancy, property, transaction and undisclosed real estate debt.
This article was generated using HousingWire Automation and reviewed by a HousingWire editor before publication.
