Silent shifts in mortgage fraud raise concerns

A conversation with Maiclaire Bolton Smith and Bridget Berg

Fraud cases aren't spiking wildly. In fact, on the surface, things look fairly steady. But that's the thing about mortgage fraud: it often hides in plain sight. In 2024, Cotality experts discovered that fraud comes in many different forms. Some types are evolving, quietly gaining traction and signaling swelling undercurrents in the housing market.  

Consider purchase fraud. Purchase fraud risk is typically higher than refinancing risk, but it's a broad category accounting for 75% of loans in the current market. Under that umbrella, transaction fraud risk, such as undisclosed agreements between the parties and down payment fraud, is making waves.

Identity fraud is also evolving. AI may be boosting identity fraud through improved document forgeries and the possibility of deepfake IDs used during closings. Also, while New York has long been the top state for fraud risk, California ranks in third-place, but the Golden State did show a double-digit increase in risk from the prior year.

These aren't just isolated issues or industry technicalities. Fraud like this can delay transactions, increase costs, or even prevent first-time buyers from securing deals entirely. It erodes trust and adds friction in a market already strained by high rates and tight inventory.  

In this episode of Beyond the Buildings, host Maiclaire Bolton Smith sits down again with Bridget Berg, the Senior Director of Fraud Solutions at Cotality. Together, they examine how fraud evolved in 2024, why certain regions are more vulnerable than others, and how the rise of technology is both aiding and complicating the fight against fraudulent activity.

In this episode

2:35 – An overview of fraud risk in the U.S.

5:22 – How has the rate of occupancy fraud changed over the course of a year?

8:23 – Why is mortgage fraud so difficult to detect and how can it be mitigated?

10:35 – Has automation opened the door to new mortgage fraud vulnerabilities?

13:44 – How can big data and advanced analytics help with fraud detection?

17:53 – Erika Stanley goes over the numbers in property market in The Sip.

19:29 – How can regulation help with fraud detection and mitigation?

Transcript

Bridget Berg:

So I would say that mortgage fraud risks are going to react to the real estate market. If we have new programs, now we have new administration in, if we have a lot of new programs or different tax incentives, that will echo back in the types of fraud that we see because people are opportunists and they'll take advantage of exploiting them for gain in the absence of any large changes. And if the real estate market continues to be stable, I would expect that the new risks are going to be emerging more gradually.

Maiclaire Bolton Smith:

Welcome to Beyond the Buildings by Cotality. I am your host Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle and look beyond the obvious. With every conversation we illuminate what is possible. Mortgage fraud is a topic that has come up before on this podcast, but that's because it's a subject that's important to keep tabs on. Mortgage fraud may seem like a topic that only affects a select few, but its impact is widespread. There's good news on the fraud front, though. For the last couple of years, cases of mortgage fraud have remained relatively stable, but not every type of fraud is created equal.

So to dive into the mortgage fraud trends that we saw in 2024 and what that indicates about the property industry at large, we have Bridget Berg, a senior director of Fraud Solutions back on Beyond the Buildings. Bridget, welcome to Beyond the Buildings.

Bridget Berg:

Thank you for having me back. Maiclaire. It's always a pleasure to have these discussions about the current state of mortgage fraud.

Erika Stanley:

Before we get too far into this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online, find us using the handle at Cotality on all our social media channels. But now let's get back to Maiclaire and Bridget.

Maiclaire Bolton Smith:

Okay. Well, I guess let's just start off with an overview of what we've seen in terms of mortgage fraud recently. Can we talk about what's the over risk nationally?

Bridget Berg:

Sure. There are several types of mortgage risk and the risk that we measure in our fraud consortium are primarily those associated with opening a new mortgage and misrepresenting something like the nature of the transaction, the value of the information about the subject property that's used as collateral or the qualifications of the borrowers.

We reported an 8.3% fraud risk increase from mid 23 to mid 24, and that kind of equates to one in 123 mortgage applications with material misrepresentation. Since then, we've seen a slight increase. So we're up to one in 119 mortgage applications as of Q4.

Maiclaire Bolton Smith:

Wow. Wow, that's actually really interesting. So I guess, are there some types that are more prevalent than others?

Bridget Berg:

Yeah, so income has been the top risk for many years. It's more than half of what Fannie Mae reports. The second most prevalent is occupancy according to Fannie Mae, and that would be, I would agree with that prevalence prior to that, liabilities was in second place for a really long time, but that recently got switched down to a lower position.

Maiclaire Bolton Smith:

Okay. I guess that makes sense. Those are the things that I think people would generally potentially try to be fraudulent on when they're going through these applications. I guess it sounds like it's becoming a significant concern for lenders. How is it affecting the overall industry as a whole?

Bridget Berg:

Well, from the industry standpoint, there's the risk. There's a lifetime warranty that you put for mortgage fraud. So unlike a credit risk or something where that might expire, if the loan is good for three years, mortgage fraud liability never expires. So for the life of that loan, they will have the repurchase recourse risk. And so that's always present. There is kind of like this contingent liability. And so the cost associated with managing that risk is probably significant for the lenders because even though it's one in 119, they have to examine every loan and try to protect themselves because it is a significant risk. So that's really kind of where the impact is.

Maiclaire Bolton Smith:

Wow, that's really interesting. And so I know if we look back to 2023, so just over a year ago you mentioned occupancy fraud. So what if we look back from then to now, what are the trends that we're seeing specifically with occupancy fraud?

Bridget Berg:

When we had the pandemic saw a large surge in occupancy fraud, and we went outside of our normal consortium data and did a larger study on occupancy fraud. And we looked nationwide even outside of our consortium, and we saw almost a doubling of what we saw as the signs of occupancy fraud nationwide over the course of from 2020 to 2023. And then shortly thereafter, then Fannie started saying, oh yeah, it's going up because there's a leg, because they've got closed loans working in applications. It was fueled by the pandemic. We had people who can live everywhere and with little explanation on, oh, of course I can work remote. And we had low interest rates. And so a lot of people were incented to buy extra real estate. And because the interest rates and the fees are much higher on non-owner occupied properties than they are for owner occupied properties, huge incentive for them to lie. And so I think that's why we saw that big surge. It's coming down a little bit, but it's coming down off of a high that came from the pandemic.

Maiclaire Bolton Smith:

Gotcha, gotcha. And I think you just mentioned something that's really important too, for somebody who may not know what occupancy, actually, how it's defined, it's that there are certain interest rates and certain privileges for an owner occupied primary residence versus it being an additional residence or one that you're going to use for an Airbnb or a short-term rental or something like that. So we started seeing people lying about the usage of this property to maybe capitalize on those low interest rates at the time and just said they were going to live there, but they actually weren't.

Bridget Berg:

Correct. And one other thing that happened during that time was the low level price adjusters actually made it even more of a disadvantage to be non-owner, and I think that probably fueled it a bit.

Maiclaire Bolton Smith:

Okay. So why do we think it's coming down now? Is it related to the higher interest rates and them not getting the same benefit or?

Bridget Berg:

I think it was that we don't have as much activity like that because the pandemic is kind of over. And yes, probably the higher interest rates, we don't have as much activity and the people who are trying to buy properties for true owner occupancy are really, there's plenty of those to go around with the shortage of inventory.

Maiclaire Bolton Smith:

Sure. Yeah. I guess it's a couple of years now since you were on the podcast when we first started talking about mortgage fraud. But I think back then we talked about how it's often difficult to detect fraud. So I kind of want to circle back to this because important to this again too, that what are some of the biggest challenges that lenders may face? And I guess in that same vein too, what are some steps that they could maybe take to mitigate any kind of transaction fraud that they might be seeing?

Bridget Berg:

So I think that first issue, the challenge that they face is the people who are trying to manage that risk are managing other risks. Also, they're managing credit risk and compliance risk and operational inefficiency. And those risks give manage very differently from fraud. With fraud. The data's wrong, the information's wrong, and people don't remember that. And with fraud, there's somebody actively trying to get around you. There's somebody actively trying to circumvent whatever you're doing. And so unless you're actually thinking about it in that way that, Hey, maybe this data is wrong, or hey, maybe somebody is really out there thinking through getting around this control, if you manage it like the other controls that don't do that, it's going to be more challenging. And some of these people who are managing this might not have risk. It might not have experience in managing fraud risk. And especially with mortgage fraud, because real estate is involved, it's much more complex, there's a lot more motives. It's not just a pure, I'm going to get some cash out of a credit card and run with it. It's more complex. So I think that's the challenge.

Maiclaire Bolton Smith:

And longer living too.

Bridget Berg:

Yeah, it takes a long time to identify it because you might have done the fraud for the property or for a longer game than say a credit card fraud. And so it, it's a little bit more difficult to know that when you've made a misstep because it might not come back to bite you for a couple of years.

Maiclaire Bolton Smith:

Sure, sure. Yeah. I guess you trigger another thought of, we talk a lot on this podcast across the real estate and mortgage industries, especially since the pandemic, we're seeing automation on the rise, and there's a lot of things that are just being more automated through different processes. And I guess when it comes to mortgage fraud, what are the potential vulnerabilities that automation has introduced?

Bridget Berg:

So we were just talking about considering the fraud risk a little differently than the other areas. Automation might reduce the possibilities that somebody, usually an underwriter stumbles upon, oh, this looks odd. Oh, this wasn't smell right. But when you go through and you say, Hey, we're going to tighten this lug nut on the car and then tighten that lug nut and it's all prescribed, you're missing the opportunity for a human to go, oh, something we didn't anticipate, something you didn't design into your process is happening here. And so the risk then is that you make a bigger mistake because you've automated it.

Maiclaire Bolton Smith:

Yeah, yeah. No, absolutely. That makes sense. It brings to mind, and I think we talked about this the last time we were here, Bridget, that when we bought this house, which there was a whole huge rigmarole over us getting this house and we were able to find the house we ended up buying and we expedited the whole close process. And it was because the mortgage company was ready to close on this other property for 90 days. So they basically just needed to validate we were still employed and the money was in our bank account, and we were able to close really, really quickly, which seemed like a great thing at the time. But then within a couple of months after we get this thing saying, please send us documentation to validate this. Please send us documentation to validate this. Please send this. And I think we were flagged because we did close so quickly that they were concerned of potential fraud with us.

And fortunately they're like, okay, yes, everything has been validated. You're on the up and up. But I think not knowing any of this at the time, I was like, why do they think I'm a bad person? But I think knowing now and listening to you talk about this, I think that's why we were flagged is because mortgage fraud was on the rise. And because we did close within 10 days that it probably was flagged as to, well, we were ready to close on property X and we ended up closing on property Y and what happened in that whole situation. Yeah.

Bridget Berg:

Well good for your lender because when I said it's one in 119, a lot of times it's kind of a deep dive you have to do to determine is it fraud or is it not fraud? And you can't afford to do that on all your loans. So it does sound like they had some more sophisticated methods for choosing the unusual transactions to dive into.

Maiclaire Bolton Smith:

Yeah, potentially. It was interesting. So I guess how can, in this day and age too, not just automation, but big data and advanced analytics, how can they be used to help with fraud detection?

Bridget Berg:

Okay, so this is my love why I went into this because there is huge, huge power in using large data, especially if you're a larger lender and you're trying to figure out which are these transactions that I do want to dive into? And so more and more data, data about the transaction details, like the loan amount and did it change, and the borrower's employer and how much they make all of those details. But also like you mentioned on the speed to close some of that metadata for where did the data come from, how quickly does this one go faster than other loans? And looking at those kinds of things that make a transaction stand out. So analyzing both those data, the main data and then the metadata around it and looking for outliers like you closed very quickly, but also looking for things that are too much the same. So clusters. So once I find a pattern that works for me, I can repeat it. And so you might see a lot of borrowers for the same loan officer in the same line of work making the same amount of money. They figured out something that works for them. So

Those are the things that you can do to look, and you can look in your pipeline. You don't have to wait until after closing. You can do this in your pipeline and instead of inspecting every loan as it's going through, which is very expensive, if you're looking at your data and you're getting that big picture view, looking down which box of chocolates might be heavy, heavier than the other one instead of trying to measure every chocolate as going along the line. So definitely an advantage there.

Maiclaire Bolton Smith:

Wow. So definitely different types of reviews that lenders are conducting, I guess. And they can do them either, as you said through the process or it doesn't necessarily have to be after close. How effective are these reviews in identifying potential fraudulent activity?

Bridget Berg:

It really depends. The standard quality control or QC review is not very good at detecting fraud. Standard QC reviews are trying, they've got a huge list. They may have hundreds of questions they're trying to answer from a compliance and a credit risk, and did they fill out this form correctly, et cetera. And they get really lost in those weeds unless you have a QC process that's really focused on fraud or pulling targeted reviews for fraud versus I'm just pulling this one loan and trying to look at everything really quickly. It's not a very strong process, especially if your QC reviewers aren't up to speed on fraud schemes or if they're not really tuned to looking at them at one big gap on qc. When they go back and they try to reverify like that example you provided of when you closed and they verified things after the fact, there's some tolerance. Sometimes at QC systems, they'll say, oh, it's okay if we didn't get this verification back. Nobody responded because they expect some level of that. But those are the ones you really have to go after when you're looking for fraud. And another thing to caution is that sometimes trusted sources are being manipulated. So

You could file false tax returns with the IRS. And when somebody goes to verify them, it'll match what you filed.

Maiclaire Bolton Smith:

It's fraud, but in a different place,

Bridget Berg:

A little more sophisticated. So you need to keep that in mind that something didn't make sense. And even though maybe I got something validated from a trusted source, if it still doesn't make sense, maybe I need to dig a little further. And if I didn't get a non-response could also be a warning sign.

Erika Stanley:

It is that time again, Cotality just dropped new numbers about what's happening in the housing market. Here's what you need to know. Over the last decade, the average national property delinquency rate has ebbed and flowed. But Cotality data shows that between 2022 and 2024, there was a steady decline in delinquencies. That all changed abruptly in 2025 when delinquencies ticked up from 4.5% in 2024 to 5.1%. But what changed? Cotality's 2025 property tax delinquency report shows a common factor. It's unemployment. Four out of the five states with the highest tax delinquency rates have a higher unemployment rate than the US average. These include New Jersey, Washington, dc, New Mexico, and Delaware. Other factors that contribute to late or unpaid mortgages include natural disasters such as wildfires and hurricanes, as well as economic factors like inflation and increasing taxes, increasing insurance costs and taxes are also quietly pushing up serious delinquencies. Recent research from Cotality found that the number of people paying 90 plus days late grew at the end of 2024. The reason the cost of owning a home long-term is rising along with escrow payments. Property tax is a serious issue, but not one without a solution. Understand the various causes and latest insight through Cotality's 2025 property tax report on Cotality.com/insights. A link is in the show notes, and that's the sip. See you next time.

Maiclaire Bolton Smith:

I guess the other thing that comes to mind is regulatory bodies. I mean, they influence a lot of things across the real estate and mortgage space, so are they involved in any kind of detection of fraud or any kind of how we handle fraud risk in the industry?

Bridget Berg:

We have not seen a huge role in regulatory actions on mortgage fraud hasn't been a top risk. What we're seeing more likely is that lenders our following audit guidance that's very focused on watchlist checks that don't really get to the heart of fraud. So I'm not sure that that's making a big impact right now. One thing that could take an impact in the future is the required reporting of who the beneficial owners are of corporations and LLCs that has been tabled recently. That was to go into effect this year. That's been a huge piece of some money laundering schemes, schemes, people hide behind LLCs, and until that goes into place, they will continue to be able to do so.

Maiclaire Bolton Smith:

Sure. Wow. Well, I think a lot to watch as the future continues with us here. And I guess that leads me to my last question. I like to often end with, if you had a crystal ball, what do you think, Bridget, what do you foresee as any future trends in mortgage fraud? And any advice on how the industry should think about preparing for combating fraud?

Bridget Berg:

I would say that mortgage fraud risks are going to react to the real estate market.

Maiclaire Bolton Smith:

Yeah, Okay. Makes sense.

Bridget Berg:

If we have new programs, now we have new administration in, if we have a lot of new programs or different tax incentives, that will echo back in the types of fraud that we see because people are opportunists and they'll take advantage of exploiting them for gain in the absence of any large changes. And if the real estate market continues to be stable, I would expect that the new risks are going to be emerging more gradually and they're going to be around the gaps that we see as the lenders push to automate more and we identify gaps. I don't think it's going to be anything huge, but we will see those gaps start to emerge as people go, oh, I can do this now because people have automated this away or under whether it's looking. Sure.

Maiclaire Bolton Smith:

Yeah. Yeah. Well, definitely something to keep an eye on and we'll have to make sure to have you back in a couple of years, Bridget, to see how we are progressing with understanding mortgage fraud. Thank you so much today for joining me on Beyond the Buildings by Cotality.

Bridget Berg:

Thank you.

Maiclaire Bolton Smith:

And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jessi Devenyns, editor and sound engineer, Romie Aromin, our facts guru, Erika Stanley and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another conversation that illuminates the ideas that will define the future.

Erika Stanley:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Bridget Berg holds the position of Senior Director of Fraud Solutions within the Property Intelligence Group for Cotality, where she leads the delivery of fraud risk management solutions to the mortgage industry. With more than 30 years of major financial institution experience, she has focused on all aspects of mortgage fraud, managing investigations, and developing fraud risk programs and analytics. Prior to joining Cotality, she was the Vice President of Fraud Strategies at Wells Fargo Home Mortgage. She earned a bachelor's degree in finance from the University of St. Thomas.

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