Rising mortgage rates since the end of Q1 may make the fraud decrease short-lived
Mortgage fraud risk dropped significantly in the first quarter of 2026, driven by a surge in refinance activity that came with briefly lower mortgage rates. But rates have since climbed back toward 7%, and the conditions that helped push fraud risk down are starting to reverse.
Cotality's National Mortgage Application Fraud Risk Index dropped to 121 in Q1, down from 133 in Q4 2025, a decrease of 9.3% year over year and 9% from the previous quarter. One in every 129 mortgage applications showed indications of fraud risk during the quarter, a return to what the company describes as historical norms.
The improvement tracked a shift in the loan mix. As rates briefly dipped into the high fives during Q1, refinance activity picked up, pushing refis to 41% of all applications. Refi transactions generate fewer documents than purchases, and fewer documents mean fewer opportunities for fraud.
Matt Seguin (pictured top), senior principal of fraud solutions at Cotality, said the trends moved where he expected them to go.
"Refis have gone up as a higher percentage of the pie, and fraud risk came down with that," Seguin told Mortgage Professional America. "With FHA non-credit qualifying and VA IRRLs, you generally don't have the asset docs, the income docs, and the appraisal. There are fewer opportunities to commit fraud. There aren't many documents left to alter at that point."
Why the good news may not last
Q1 is already history, and mortgage rates have climbed back toward 7%. The refi window has largely closed. Seguin said the index will likely surge once again in Q2.
"I would expect refis will drop, purchases will become a bigger piece of the pie, and with the purchases come more risk because there's more opportunity for fraud," he said. "So I would expect the risk index to go up."
He also pointed to a softer housing market as something he is watching. Homes are sitting longer in many markets, and whether that suppresses fraud or creates new forms of it is still unclear.
"There's another layer in there that I don't know how it's going to react," he said. "Houses are sitting on the market a lot longer. What kind of factor will all of that play into it as well? That's kind of an unknown."
One contributing factor to Q1's improvement was a pullback in investment property applications. In Q4 2025, investment and multifamily properties accounted for 13.4% of all applications. That dropped to 12% in Q1. Investment properties are among the riskiest segments in the index.
Seguin thinks rising rates are part of the explanation.
"I think there's a point where it's like diminishing returns on a return on investment," he said. "Maybe a rental cash flows at 6% but not at 6.75. And fewer properties are going to cash flow the further you go up the rate spectrum."
The motivation to commit fraud
The broader economic picture adds another layer of concern. Surging oil prices driven by ongoing geopolitical tensions have pushed inflation higher, raising costs across the board for homeowners and homebuyers alike. Higher gas prices feed into higher prices for goods and services, squeezing household budgets and making it harder for borrowers to qualify at already elevated rates.
Tighter economic conditions raise a concern beyond loan mix mechanics, Seguin said. When borrowers get squeezed, some look for ways to get deals across the line that would not otherwise qualify.
"As a consumer gets more strapped, the DTI gets tighter, and there's probably going to be more motivation to alter that pay stub at a zero here and there to get you under the so called 50% threshold," Seguin said. "Those kinds of things definitely bring in motivation."
The same pressure applies to the people originating those loans.
"Maybe it's a loan officer who has 10 loans on his book. Nine of them qualify as is," Seguin said. "As the consumer gets more strapped, maybe that same batch a year later is only six of those loans qualified. And now the loan officer might be more motivated to help get some more of those loans across the goal line. And sometimes that involves doing things that would be considered mortgage fraud."
Reduced CFPB staffing has raised questions about federal oversight, but Seguin said mortgage fraud is clearly on the radar regardless, as the latest survey was noted by Federal Housing director Bill Pulte.
"Director Pulte's been pretty clear on that. He actually tweeted our report," he said. "Don't rest on your laurels is the right thing to say."
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