The rapid growth of debt-service coverage ratio (DSCR) lending was a driver of increased mortgage application fraud in the fourth quarter, a report released Thursday by Cotality says, which for the second consecutive month flagged concentrated fraud risk in the investor segment of borrowers.
An index created by the property data firm to track mortgage application fraud risk showed a reading of 133 last quarter, up 1.5% year over year. About 1 in every 118 applications was flagged for fraud risk, about the same pace as the previous quarter.
“This increase appears to be driven by more volume in investment property applications,” the company said.
The two highest-risk categories remained the investment and multifamily sectors, with Cotality estimating that 1 in 43 investment applications and 1 in 27 multifamily applications had suggestions of fraud, slightly worse for investors (1 in 45) but slight better for multifamily applicants (1 in 26) than in the third quarter.
“The increase in volume in these two segments has led to a slight increase in the Fraud Risk Index,” said Matt Seguin, a senior principal for mortgage fraud solutions at Cotality. “This change seems to have been driven, at least partially, by the surge in popularity of the DSCR loans.”
The company’s analysis focused heavily on the impact of rising investor application activity overall. Real estate fraud risk was the only subcategory to rise year over year, up 8.6% in the fourth quarter.
Three months of trended data show that non-owner-occupied homes triggered undisclosed real estate debt alerts at a rate more than 2.5 times the rate of owner-occupied homes, a continuation of a trend flagged in the third quarter.
Seguin also commented on a 19% annual spike in fraud risk on refinance applications, though the index is only up 1.5%.
“This is significant because historically, refis bring a much lower risk of fraud than purchases,” he said, having also flagged the refinance fraud risk in the third quarter “as more investors juggle multiple mortgages with multiple lenders.”
Comprising nearly 3 in 10 home sales in 2025, according to Cotality data, investor-buyers have propped up U.S. home sales in recent years as typical buyers have struggled to overcome stark affordability barriers.
Income, property and occupancy alerts also rose in the fourth quarter. Income alerts might relate to an inability to verify employment, while property alerts might relate to risks of portfolio churn. The latter scenario involves properties being bought and sold quickly to inflate values, something that stands out in a slow sales and softening home price environment.
Cotality analyzes loan-level data on millions of mortgage loan applications submitted for various loan types for individual borrowers, with algorithms flagging indicators of fraud risk.
The company said it saw overall mortgage applications decline by less than 1% over the quarter, with purchase share contracting to 62% of transactions. The share of applications for government-backed mortgages was flat at around 24%.
