Report: Poor Math Skills Contributed to Mortgage Crisis
If math isn’t your strong suit, a new study suggests thinking twice before getting a mortgage.
A paper published in the Proceedings of the National Academy of Sciences found that poor math skills and a lack of financial literacy were correlated with a significant number of defaults during the subprime mortgage crisis. Those defaulting in this category weren’t just low-income mortgage holders, either. According to one of the study’s authors, Lorenz Goette, “It’s not that subprime mortgage borrowers were low income — it’s more that they had huge mortgages in comparison to their incomes.”
The average income in the survey was $80,000, making income a non-reliable variable in determining the likelihood of default. Perhaps more surprising is that the type of mortgage also didn’t matter. If someone was bad at math, it was evident across all available types of financing.
The problem is in the person’s inability to perform basic calculations, such as determining the effect of inflation on money and predicting the cost of a payment. In a phone interview with the Wall Street Journal, Goette said: “We find that poor numerical ability is correlated across the board for all types of mortgages. That means restricting the types of mortgages won’t solve the problem. Even if we let people buy fixed-rate mortgages, there would still be defaults.”
The study was exhaustive, with the authors controlling for numerous characteristics to ensure that the results were not skewed for any variable other than numerical ability. Survey questions varied from calculating the cost of an item on sale at half price to evaluating the effect of inflation on money.
The paper could change the tone of the discussion on the financial crisis. With banks usually bearing the brunt of the blame, the focus could shift to individuals whose lack of numerical ability undermined their decisions on mortgage payments and getting a mortgage they could afford.