Borrowers Who Are Bad at Math More Likely to Go Into Foreclosure

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.

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  1. attempter

    Innumeracy in the borrower means having less market information than the lender? And the lender exploits that information imbalance?!

    But…but…I thought both of those were impossible. Chicago ideology told me so. Everyone’s rational and fair and the “market” distributes all the information equally.

    So what gives? One would think the ideology has once again (for the ten thousandth time) been proven a Big Lie.

    Not for the corporate NYT, of course. The problem wasn’t in the original deal, where everyone was perfectly informed and rational. No, the borrower just proceeds to sustain a financial collapse in his slovenly private budgeting. The mortgage then become the innocent victim of that.

    But that’s not the falsehood of the ideology or the turpitude of the bankster, and certainly not a failure of “the market”, oh no!

  2. Skippy

    I did it for the chicks…you know nice pad, sexy car, lavish life style.

    Skippy…how’s a guy too get laid in this day and age of advertising with out it…oops…I for got drugs.

    PS. I’m only a man with desires…sorry.

  3. purple

    Could just mean people with poor math skills or worse at keep jobs or there is some other hidden variable, or set of variables, that connects the two.

  4. koshembos

    Well if the test of math knowledge is 300 divided by 2 then we can concluded with similarly significant result that presidents from Chicago must be bad, that Muslims are better at bomb making and that the sun and the moon have a gay relationship.

    You can build anything on the base and a false premise.

  5. alex black

    It pains me to realize that 16% of my fellow citizens cannot divide 300 by 2 and calcutlate what 10% of 1000 is.

    But it explains a lot….

    1. RueTheDay

      “It pains me to realize that 16% of my fellow citizens cannot divide 300 by 2 and calculate what 10% of 1000 is.”


      We’re talking about second grade arithmetic here, stuff a 7 year old should know. Our education system is failing miserably.

  6. craazyman

    When they asked 50 top Wall Street executives to subtract $1 trillion in losses from $50 billion in equity, they all came up with profits somehow. It must have been a lucky guess. :)

  7. Kevin Smith

    When my wife and I were in Australia a few years ago, we noticed billboards erected by the Federal Government urging citizens to go to a website where they could upgrade their economic literacy and numeracy.

    We thought it was a brilliant down-to-earth idea, and worthy of emulation here in North America.

    How did that work out?

    1. alex black

      I’m guessing it went about as well as Steve Irwin’s attempt to make friends with a stingray.

      1. Skippy

        Bless the American in_a_can_media, its effects are like meth.

        Skippy…The money they spent of professional psychologists was well worth it.

  8. Dwight Baker

    TRUTH IN LENDING is a law,

    COMMON LAW is not held in high esteem

    COMMON PEOPLE have been led astray for centuries


  9. Wayne Martin

    The problem is more extensive than just innumeracy, as the functional illiteracy of people in the US is a growing problem:

    Illiteracy Statistics

    o) 42 million American adults can’t read at all; 50 million are unable to read at a higher level that is expected of a fourth or fifth grader.

    o) The number of adults that are classified as functionally illiterate increases by about 2.25 million each year.

    o) 20 percent of high school seniors can be classified as being functionally illiterate at the time they graduate.

  10. lee

    People who are good at math would not have signed up for any of these terrible financial packages … the myriad of housing loans or credit card debts etc simply because they’re aware of the burgeoning debt they’re getting into. the rest are just taken away by the “lifestyle” they could “afford” and landed themselves into crap.

  11. anonymous

    People who lack the basic math skills to calculate income/costs of home ownership really have no business signing contracts of this sort. What they should be doing is getting the basic math skills and consulting with family or friends who have bought/built and paid for several homes.

    The home purchase is the single biggest investment most adults make. Governments have done far too little to protect borrowers from predatory lenders. That said, I remain convinced that many borrowers got burnt because the figured the value of the home would continue to increase forever.

    I’ve made a number of poor investment decisions over the years and nobody is rushing out to get me my money back.

  12. Sechel

    If we had a know your customer rule the industry would be accountable and these inappropriate mortgages would not be underwritten. The White House should not try to over-burden us with needless regulations and instead use solutions that have worked elsewhere. On a separate point, it’s a abomination that high school graduates can’t do basic arithmetic.

  13. eightnine2718281828mu5

    Who would have ever thought that contracts designed by a staff of folks with +3 std deviation IQ’s would get the better of signers with -1 std deviation IQ’s?

  14. Ronald

    I am terrible at math, need a calculator for the most simple math and have never done any home budgeting. So I added up the gross revenue from buying and selling 5 homes in Calif since 1974. 1.1 million gross equity over these years not bad for a math idiot! Plus I never read one damn line of all those contracts I signed was way to busy making a living and been a renter since 2005 without any consulting with RE professionals or financial analyst. My take is that blind luck and market timing is more important then math skills!!

    1. K Ackermann

      Luck and timing is important in many things. People often confuse a green light for a guarantee they will get to the other side of the intersection.

  15. debra

    Literacy is a problem.
    The BIGGER problem is that the contracts have become too complicated anyway. ALL the contracts.
    You already stuck a post down about the contract mentality.
    NOBODY wants to read those contracts, for example.
    The math goes along with it.
    Look at the American IRS form.
    It is outrageous. When people are illiterate already ?
    That is a joke.
    We need to simplify LOTS of stuff.
    I call this the “debating about angels on the head of a pin” phenomenon. It is important in human society. IN ITS PLACE.
    But when you allow the people who do it to run your economy, you are in for big problems…

  16. scharfy

    What, I’m approved? That’s all the math most needed to hear.

    My math skills went haywire when I saw dat a McMansion wit a pool could be had for “NO MONEY DOWN!”. Couldn’t even add 2+2. forget about resets and ARM’s and blah, blah , blah! This baby was 5,000 square feet of glory. Honey can you imagine cookin out by the pool in the back?

    Actually, people with no assets and slim income who levered up on a house they couldn’t afford made a perfectly wise decision, . No skin in the game – freeroll. Its the banks who got picked off on that one. They seemed a touch mathematically challenged as well.

    No worries we bailed ’em out though.

    Having a giant Jubilee is the only way out of this. A biblical debtors revolt. Wouldn’t that be sweet?

    World keeps on spinning around.. Amazing. Humans have this annoying little tendency – they survive.

  17. eightnine2718281828mu5

    They seemed a touch mathematically challenged as well.

    Not at all; bonus formulas described their incentives quite clearly.

  18. Sechel

    Financial firms should be required to offer “vanilla products” to their clients. Thirty years ago people knew there were two types of mortgages 30 year and 15 year. Look at what this innovation has brought up? Volcker was right, all this financial innovation and the best they could do was the ATM.

  19. Laocoon

    Beyond math and reading literacy, there seems to be another form of literacy that’s missing, let’s call it ‘connections literacy.’

    I don’t know how to measure this, but I’ve observed a number of people who are fully aware of their monthly budget and make the same mistakes. They rely on unsubstantiated hope [‘magical thinking’] that they will somehow land that dream job, their home will quadruple in value, they’ll win the lottery, marry a millionaire, or whatever. They ignore all early warning signs that their cash flow isn’t enough to fulfill their responsibilities. I’ve seen this at all educational levels, and sometimes the graduate degree holders are less adept than the woman who just got her GED at age 50.

    So they either: 1) aren’t putting it together, or 2) are in denial. Somehow we need to get people to know what their reality is and to connect their actions with that reality. The numbers skills are basic, but connecting and accepting is key also.

  20. justsaying

    I’m a little late, but it’s okay.
    What about the parents of the baby boomers who didn’t finish school that bought and paid for homes?
    I feel that greed is the problem, the need to have it all, and have it all right now! Most people can figure out how much they make a month and what their bills are. It’s the “I don’t have any extra money, but going to spend borrowed money anyway” that got people in trouble. Start off with a mortgage that makes the budget tight, then add the mentality of “I’ll just charge what I want” that sunk a lot of people.
    I do believe that the banks and loan officers should educate borrowers on what they really are getting into but even that may not help. The heart wants what it wants, and will discard what it is done with.

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