Whalen Global Advisors warns incomplete credit data may distort mortgage scores

Whalen Global Advisors says mortgage lenders may be pricing loans off credit scores built from incomplete borrower files, potentially raising rates, mortgage insurance costs and denial risk. The analysis argues the industry should combine all reported credit data into one file before calculating a single score.

Why it matters: - Incomplete credit data can change the mortgage terms a borrower receives, including interest rates, mortgage insurance costs and loan approval odds. - Whalen Global Advisors says the financial impact can add up to thousands of dollars over the life of a mortgage. - The issue also matters for lenders and investors because inaccurate scores can distort risk pricing and capital decisions.

What happened: - Whalen Global Advisors published a new analysis warning that mortgage credit scores may be inaccurate when lenders rely on incomplete credit histories. - The analysis appeared in the latest issue of The Institutional Risk Analyst. - David Battany, executive vice president of capital markets at Guild Mortgage, argued that the current system can produce multiple credit scores for the same borrower because the three major credit bureaus may each be working from incomplete files. - The publication is based in Estero, Florida.

The details: - Battany said the average of three incomplete credit files does not produce one accurate credit score. - He said lenders may be making mortgage decisions on scores that materially overstate or understate a borrower’s true creditworthiness. - The analysis says mortgage interest rates, loan approvals, private mortgage insurance premiums, mortgage-backed securities, servicing valuations and regulatory capital requirements all depend on accurate borrower credit risk measurements. - Whalen Global Advisors says the current system can produce score differences of 40 to 80 points for the same borrower on the same day. - Battany argues the problem is not the scoring models themselves, but the incomplete data used to generate them. - He proposes combining all reported credit information into one comprehensive file before calculating a single definitive score. - Christopher Whalen, chairman of Whalen Global Advisors, said most consumers assume they have one definitive credit score, but incomplete data can make the result inaccurate. - Whalen said the technology already exists to use complete information before making financial decisions.

Between the lines: - The analysis shifts the debate from which credit scoring model is best to whether the underlying data is complete enough to make any score reliable. - That framing could pressure lenders and mortgage market participants to look more closely at how credit files are assembled before pricing risk. - The warning also suggests some borrowers may be paying more not because they are riskier, but because the system is not seeing their full credit history.

What's next: - Whalen Global Advisors says the mortgage industry should move toward one complete credit file instead of averaging multiple incomplete ones. - The firm says borrowers shopping for a mortgage should ask lenders how their credit score was calculated and whether it was based on complete reported credit history. - The company also says consumers may not know whether the score used to price their mortgage truly reflects their financial history until the process changes.

The bottom line: - Whalen Global Advisors is arguing that the mortgage industry has a data problem, not just a scoring problem, and that incomplete credit files may be distorting costs and access to home loans for millions of borrowers.