05/14/10 Geneva, Switzerland – The foreclosures that led to financial crisis began with homeowners falling behind on their mortgage payments. Yet, have all the factors behind the foreclosures been uncovered?
To date, much of the blame has been assigned to predatory lenders. However, a new and strikingly simple finding explains another significant factor. The Atlanta Federal Reserve has recently released a paper that shows that the numerical skill of homeowners has a meaningful impact on the rate at which they fell behind on mortgage payments.
According to The Economist:
“The economists tracked down a large number of subprime borrowers in New England on whom they already had detailed information, including the terms of their mortgages and their repayment histories. These borrowers were then subjected to a series of questions that required simple calculations about percentages and interest rates.
“Even accounting for a host of differences between people—including attitudes to risk, income levels and credit scores—those who fell behind on their mortgages were noticeably less numerate than those who kept up with their payments in the same overall circumstances. The least numerate fell behind about 25% of the time. For those who did best on the test, the number of payments they missed was almost 12%. A fifth of the least numerate group had been in foreclosure, but only 7% of those who were more numerically adept had.
“Surprisingly, the least numerate were not making loan choices that differed much from their peers. They were about as likely to have a fixed-rate mortgage as the more numerically able. They did not borrow a larger share of their income. And loans were about the same fraction of the house’s value.”
The Atlanta Fed has managed to show that homeowners that are better at these math skills tend to also be better at managing household finances. In and of itself, it’s a hardly surprising finding. However, it also goes to show that basic numeracy offers some ability to predict the outcome of subprime homeowners, much like other factors generally used to judge creditworthiness, such as income and credit scores. Maybe loan officers should start including a math test in their assessments.
You can visit The Economist to read more details on how subprime mortgage defaults resulted in part from the fear of all sums.
Best,
Rocky Vega,
The Daily Reckoning
Rocky Vega
Rocky Vega is publisher of The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.
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“The Atlanta Fed has managed to show that homeowners that are better at these math skills tend to also be better at managing household finances. In and of itself, it’s a hardly surprising finding.”
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Excellent, well written. Cold and calculating though it be. Of course,you posited not an opinion as to agreement.
Rather you let the language stand on its own. Silence on a matter might well indicate agreement.
No problem. You’re one of those who will review my case, a decision you and your generation will live with.
P>S> in reviewing prior to upload, one might consider there is never a need for the word ‘that’.
What they really are saying “translated” for you.
Blacks dont pay their bills and have much higher default rates than whites.
Maybe we should start giving math tests to congressmen.
I’d really like to see how many of these “less numerate” folks had/have loans considered predatory in nature… Obviously the least numerate would also be the most easily taken advantage of by predatory lenders, which would also account for the higher default/foreclosure rates.
I don’t think the math was the issue…. I think it was simpler, people never read their mortgage agreements. They only heard the payment for (x) years and the profile they “would” receive at the reset of the ARM. Since homeowners were sold that real estate always goes “UP”… ooops, it went down. Sorry….
There’s the importance of college education, I guess.
But it isn’t the entire issue, only a small percentage. A lot more than just math goes into these.
As high school teacher I’ve noticed a significant number of students today do not read (e.g., open-ended questions on exams), give up on trying to solve problems if it takes more than a few seconds of concentration and doesn’t pay attention in class when the teacher is trying to teach about APY and monthly payments on a loan. Based on my experience, the results of this survey are not surprising. But, we will continue to try to motivate and education our future.
Well worth the read, I’m not quite sure I’ve even grasped it, but it’s interesting nonetheless.