Transaction risks and occupancy red flags surge in challenging market environment
Mortgage fraud risk in the US edged higher in the first quarter of 2025, with market conditions adding new pressures for both buyers and lenders, according to a new report
Cotality’s National Mortgage Application Fraud Risk Index for Q1 2025 dropped to 133, down a marginal 0.3% from the end of 2024 but up 7.3% year-over-year, an increase from 124 in Q1 2024.
The most significant rise was in the transaction risk category, which jumped 4.6% year-over-year. Transaction risk reflects cases where key elements of a home purchase transaction are not fully disclosed to lenders, such as hidden sales concessions, non-arm's length sales, and rapid property flipping.
“While mortgage delinquencies are currently low across the US, the market is ripe for an increase in fraud because of the continuing high interest rates, slow housing market, and other increasing costs of homeownership like insurance affordability,” said Matt Seguin, senior principal of fraud solutions at Cotality. “If market conditions continue to challenge sellers, risks like misrepresented down payments, inflated prices, and straw buyers could increase dramatically.”
The Mortgage Bankers Association (MBA) reported the delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted 4.04% in Q1 2025. That’s up six basis points from Q4 2024 and 10 basis points higher than Q1 2024. The rate of loans entering foreclosure also increased by 5 basis points to 0.20%.
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Despite these risks, overall mortgage application volume remained steady quarter-over-quarter, with purchase transactions accounting for a strong 67% share. Notably, the share of government-backed loans grew from 24% to 26% of applications.
Cotality’s analysis highlighted several fraud risk trends that showed moderate increases from December to March:
- Income: More applications flagged for high income relative to time on the job or geographic norms.
- Transaction: Increased alerts for purchase transactions with multiple high-risk elements, such as property values inconsistent with the borrower’s age or in depreciating markets.
- Occupancy: More alerts suggesting a primary or secondary home may not be occupied as stated.
- Property: A rise in properties being resold within a year and higher property value alerts in certain areas.
One notable spike, the number of owner-occupied properties listed for rent in the previous 180 days soared by 50%, the largest quarter-over-quarter increase. However, other indicators suggest that overall occupancy risk has stabilized.
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