Mortgage fraud risk continued to ease in the first quarter of 2026, returning closer to historical norms as refinance activity increased and investor loan volume moderated, according to new data from Cotality.
The company's National Mortgage Application Fraud Risk Index fell to 121 in Q1 2026, down 9.3% from a year earlier and 9% from the fourth quarter of 2025. Cotality estimates that approximately one in every 129 mortgage applications contained indications of fraud risk during the quarter.
The decline comes as refinances accounted for a larger share of mortgage activity, reaching 41% of applications during the quarter. Overall application volume increased 6.7% from the previous quarter, while purchase loans represented 59% of transactions. Government-backed loans accounted for 23% of all applications.
Despite the overall improvement, lenders continue to face elevated fraud risk in investor and multifamily lending.
Cotality estimates that one in 44 investment property applications and one in 29 multifamily applications showed indications of fraud risk in Q1 2026, compared with the industry-wide average of one in 129 applications.
The report found that undisclosed real estate risk remained the only fraud category to post a year-over-year increase, rising 7.7%.
According to Cotality, undisclosed real estate fraud can conceal additional debt obligations, occupancy misrepresentation, or prior credit events such as foreclosures, short sales, or notices of default.
The company said the increase appears tied to investment property lending, where undisclosed real estate alerts historically occur at rates roughly 2.5 times higher than on owner-occupied properties.
"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," said Matt Seguin, senior principal of Mortgage Fraud Solutions at Cotality. "In Q4 2025 investment and multi-unit represented 13.4% of applications but that dropped to 12% in Q1 2026, roughly an 11% decrease."
Seguin cautioned that lenders should not interpret the lower index as a reason to relax fraud controls.
"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," he said. "It's also worth noting that while all fraud risk categories declined year-over-year, except undisclosed real estate, we do see property (inflated value) and transaction fraud risk both have risen quarter-over-quarter, 1.4% and 7.1% respectively."
While most major fraud categories improved on an annual basis, Cotality's analysis identified several emerging trends during the quarter.
Income-related alerts increased for borrowers reporting unusually high income relative to their age. Property-related alerts rose for transactions involving homes sold within the previous 12 months and properties owned by corporate entities or LLCs. Occupancy-related alerts also increased, including cases in which borrowers claimed a second home located within 25 miles of their primary residence or listed a property as a primary residence refinance while using a different tax mailing address.
At the state level, New York remained the highest-risk market for mortgage fraud indicators, followed by Florida, Connecticut, New Jersey, and California. Connecticut recorded the largest increase among the top five states, rising 6% from the prior quarter, while Florida increased more than 3%.
The Cotality National Mortgage Application Fraud Risk Index is based on residential mortgage applications processed through the company's LoanSafe Fraud Manager platform and measures industry-wide application fraud risk across six categories: identity, income, occupancy, property, transaction, and undisclosed real estate debt.
