Layla Zulfa
Investors are increasingly probing the intricacies of Debt-Service-Coverage Ratio (DSCR) loans, a rapidly expanding segment of the mortgage market that operates independently of government-backed financing structures. This intensified due diligence reflects a maturing market that, while experiencing robust demand, is also navigating the lingering shadows of past fraudulent activities.
Charles Goodwin, vice president and head of bridge and DSCR lending at Kiavi, observed a distinct shift in investor engagement. "We’re having to do more explaining about how we think about the underwrite, how we arrived at the value, or just changes to our policies," Goodwin stated in an interview with HousingWire. He characterized the current environment as more collaborative, noting that this increased scrutiny has not diminished demand or significantly driven up premiums. This suggests a market that is becoming more sophisticated and risk-aware, demanding greater transparency from lenders.
The heightened investor caution is a direct consequence of a significant fraud scheme that came to light approximately a year prior in Baltimore. In this elaborate operation, a group allegedly acquired hundreds of homes, predominantly in majority-Black neighborhoods, at vastly inflated prices. These transactions were financed through hundreds of millions of dollars in DSCR loans provided by numerous private lenders. A sobering aftermath saw more than half of these loans default, exposing vulnerabilities within the then-nascent DSCR lending landscape. The Baltimore case served as a stark reminder that the allure of rapid growth and less stringent underwriting could create fertile ground for illicit activities.
Despite the reputational damage inflicted by the Baltimore scandal, the broader national growth trajectory of the DSCR market has remained largely unhindered. DSCR loans are specifically designed for real estate investors, offering a compelling alternative to traditional mortgages by bypassing the need for W-2 forms, pay stubs, or personal income verification. Instead, borrowers are assessed based on the projected rental cash flow of the property, effectively placing these loans outside the purview of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. This reliance on property-level performance metrics is a key differentiator and a significant driver of their popularity among investors.
Quantifying the Growth of DSCR and Investor Loans
Isolating precise data for DSCR loans can be challenging, as such data is often aggregated with broader investor loan categories. However, available estimates paint a picture of substantial expansion. According to data from Optimal Blue, the combined lock volume for DSCR and investor loans saw a remarkable surge of approximately 40% between January 2022 and mid-2025, a period that encompassed the unveiling of the Baltimore fraud case. By August 2026, this growth trajectory accelerated, reaching an impressive 130% increase in lock volume.
Furthermore, as a share of non-Qualified Mortgage (non-QM) production, investor and DSCR loans have steadily gained ground. In August 2022, these loans constituted 22% of non-QM originations. This figure rose to 28% by August 2025 and further climbed to 35% by August 2026, according to Optimal Blue’s analysis. This trend underscores the growing importance of these specialized loan products within the broader non-QM market.
Drivers Behind the Market Expansion
Several converging factors are propelling the growth of the DSCR loan market. Analysts at Bank of America project that non-QM originations are poised to reach $175 billion in 2026, with a significant portion of this growth attributed to DSCR and investor loans. Their June report highlighted that these loans now represent 50% of all collateral within the non-QM space, even surpassing agency and private-label investor issuance in 2025.
Lending executives cite a confluence of economic and market trends as key drivers. Stretched homebuyer affordability, a persistent issue in many U.S. housing markets, is pushing more Americans towards rental properties. This demographic shift creates a robust demand for investment properties, which in turn fuels the need for DSCR financing. Concurrently, mega lenders such as Rocket Mortgage and United Wholesale Mortgage have aggressively diversified their product offerings to include DSCR loans. This strategic move allows them to navigate the prevailing high-interest-rate environment and capture a larger share of the investor market.
The intense competition among lenders is also contributing to relatively stable pricing. Ben Fertig, president at Constructive Loans, indicated that DSCR loan rates are currently hovering between 7.125% and 7.25%. This competitive pricing makes DSCR loans an attractive option for investors seeking to acquire rental properties.
Fertig further elaborated on the broader market dynamics, stating, "DSCR complements one of the largest trends in housing broadly, which is rentals becoming a bigger percentage of housing overall." He noted that originators who traditionally focused on conventional, owner-occupied mortgages have actively pivoted to DSCR products to maintain origination volume and adapt to a challenging market.
For many small, local real estate investors, securing a DSCR loan often proves to be a more streamlined process compared to the stringent requirements imposed by regional or local banks for investment property lending. Jacob Washburn, branch manager and senior mortgage adviser at Cornerstone Home Lending, explained, "The majority of users of this program are small, local real estate investors. It’s not big Wall Street, institutional, corporate investors." He added, "Oftentimes, it can be challenging for that profile to fit the box of traditional lending. In the DSCR loan, what we’re looking at is: Does the property itself generate enough income to support the debt service?" This focus on the property’s financial viability simplifies the qualification process for a significant segment of the investor community.
Vulnerabilities to Fraud and Risk Mitigation
The very characteristics that make DSCR loans appealing to legitimate investors also render them susceptible to exploitation by fraudulent actors. The ability for borrowers to operate through limited liability companies (LLCs) can obscure their identities. The absence of rigorous income and employment verification, a hallmark of traditional underwriting, can be exploited. Furthermore, the capacity to acquire multiple properties simultaneously without extensive personal financial disclosure presents another avenue for potential abuse.
Data from Cotality, an entity that tracks mortgage fraud risk, reveals a concerning trend. At the close of the second quarter, one in 119 mortgage applications of all types exhibited signs of elevated fraud risk. However, for investment properties, this ratio escalated to one in 44. The risk was even more pronounced for properties with two to four units, where it rose to one in 27 applications. It is important to note that Cotality’s data does not confirm actual fraud but rather identifies elevated risk indicators, and it encompasses both DSCR and GSE-backed investor loans.
Matt Seguin, senior principal of mortgage fraud solutions at Cotality, highlighted the persistent risk associated with these segments. "These two segments have historically been the most risky over the last 15+ years by roughly 3x or more," Seguin stated. He further observed a significant increase in the volume of these higher-risk segments. "We’ve seen within our consortium data that the portion of volume in those two segments has gone from about 7% of the total volume in 2024 to about 12% in 2026, a 58% increase in a couple years when combining the two segments."
Cotality categorizes fraud risk into six distinct areas: income, occupancy, undisclosed real estate debt, identity, property, and transaction. During the second quarter, one category experienced a notable uptick: undisclosed real estate debt risk rose by 2.6% year-over-year. Seguin emphasized the relevance of this finding, stating, "This is pertinent as these alerts are 2.5 times more likely to fire on an investment property versus an owner-occupied property based on our research." This spike directly correlates with the surging market share of investment and multi-unit applications, indicating a growing concern around concealed financial obligations.
On the operational front, lenders are actively on alert for various fraudulent schemes. These include the use of altered documents, artificially inflated appraisals, straw buyers concealing third-party involvement, and "reverse occupancy" fraud, where an investor illicitly resides in a rental unit. To combat these threats, the industry is increasingly leveraging technology. Lenders are deploying sophisticated algorithms, conducting extensive database sweeps, performing LLC cross-checks, and utilizing digital photo analysis to identify and deter fraudsters.
Under the Microscope: A Fragmented Underwriting Landscape
Despite the growth and the emerging concerns about fraud, not all lenders are adhering to the same rigorous underwriting standards. Ramon Bullard, vice president of U.S. residential mortgage-backed securities (RMBS) ratings at Moody’s Ratings, noted the variability in post-Baltimore practices. "There are a lot of originators out there who’ve done work post-Baltimore, but the quality varies. There are people who are doing it really well; there are people who aren’t doing as good of a job," Bullard commented.
Moody’s published a comprehensive report in late August that examined the underwriting practices of approximately 30 DSCR lenders and aggregators. The analysis focused on key metrics such as calculations, floors, reserve requirements, and guarantees. The ratings agency identified a highly fragmented market, with many lenders embracing demonstrably "weaker" standards.
Specific findings from the Moody’s report included:
- Appraised Value vs. Actual Rent: 30% of programs allow borrowers to utilize the higher of appraised value or actual rent without a cap, potentially inflating loan amounts.
- DSCR Floors: A significant 40% of programs permit DSCR floors between 0.75 and 0.99, which are less stringent than a full 1.0 coverage.
- Reserve Requirements: 73% of programs allow cash-out proceeds to satisfy reserve requirements, potentially depleting essential liquidity.
- Personal Guarantees: Half of the surveyed lenders do not mandate personal guarantees from majority owners of LLC borrowers, weakening recourse in case of default.
Despite these more lenient underwriting guidelines, the market has not experienced a significant downturn in actual losses. Industry experts attribute this resilience to several factors. Personal recourse guarantees, for instance, are a critical tool. While some lenders may not mandate them from majority owners, 93% of the reviewed programs require a personal guarantee on loans to LLCs. This leverage is vital for compelling repayment and mitigating the need for foreclosure.
Karandeep Bains, head of U.S. RMBS at Moody’s Investors Service, highlighted the borrowers’ financial commitment. "If you look at the CLTV (combined loan-to-value) of a lot of these DSCR loans in the pool, you’re talking about high 60s to low 70s, so that is a borrower who is putting 30% down," Bains explained. "These are borrowers that have significant skin in the game and have sufficient resources to make a substantial equity investment. But, all things equal, you’d rather want to see underwriting guidelines that are in the strong category." This substantial down payment indicates a borrower with a strong financial stake in the property, offering a cushion against potential market fluctuations.
The Bank of America report further contextualizes the loss rates within the broader non-QM sector. Cumulative losses across the entire non-QM market stand at a modest 3.6 basis points, representing approximately $281 billion in securitized originations since 2018. Out of 580,000 loans analyzed, only about 1,000 have incurred cumulative losses exceeding $10,000. While 30-day-plus delinquencies for investor loans did peak in May 2025, they remained below the 6% threshold, suggesting a degree of market stability.
The Path Forward: Vigilance Over Retreat
For the time being, market observers largely view the Baltimore fraud case as an isolated incident of malicious actors rather than an indictment of systemic issues within the DSCR lending framework. The prevailing sentiment among originators is one of increased vigilance, not a withdrawal from the market.
"The lesson I probably take from Baltimore is, it’s not that DSCR loans are bad, it’s just that transparency, verification, all that just has to keep pace with innovation of new loan programs," Washburn articulated. He emphasized the positive contributions of the majority of DSCR borrowers, stating, "The overwhelming majority of DSCR borrowers are responsible real estate investors providing housing for their communities, and I wouldn’t want a fraud case to define the product." This perspective underscores the importance of maintaining faith in the product’s utility while reinforcing the need for robust risk management and transparency to ensure its long-term integrity and continued growth.
