The New York Times reports on an intriguing study:
Columbia University assistant business professor, Stephan Meier…. found that borrowers with poor math skills were three times more likely than others to go into foreclosure.
Mr. Meier conceded that the results were not shocking, but he said he had not expected the connection between math skills and mortgage default to be so pronounced.
About 340 borrowers in Connecticut, Massachusetts and Rhode Island who took out subprime loans in 2006 and 2007 were surveyed in 2008. None were in foreclosure.
The respondents were asked five questions, with the first requiring borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000. (Since the survey was conducted by telephone, the questioners did not know who was using a calculator.)
About 16 percent of the respondents answered at least one of the first two questions incorrectly. Mr. Meier said that the results were consistent among all levels of education and income.
Over all, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter.
Yves here. The story relies on the premise that the reason subprime borrowers with weak math skills are more likely to default is because they have poor budgeting skills. There could be something to that. As the original subprime borrower (I purchased an apartment in 1983 with no equity, which was particularly impressive given that the co-op restricted mortgages to 50% of the purchase price), I prepared three years of forecasted monthly payments (by hand, mind you, this was in the scriveners’ days of Wall Street) to make sure I could afford all the charges associated with the apartment.
But I’m more than a little surprised that the story fails to consider that less than math literate borrowers would be particularly susceptible to aggressive or unscrupulous mortgage salesmen. Whenever I am in a cab out of town, I talk to the driver about the local economy, and the discussion almost always includes the real estate market. In 2006 to 2008, I had at least a half dozen of them tell me that when they had gone to buy a house, the bank told them they could afford a much larger mortgage (and by implication, house). They had all thought the banker was nuts, that their finances would have been very strained had they taken his advice. By contrast, someone who did not have a firm handle on his budget (and that appears to correlate with math skills) could easily be persuaded by the banker (the expert!) to deep dive into debt.