Foreclosure More Likely if You’re Bad at Simple Math

April 28, 2010 No Comments »

numbers

There’s a better chance you’ll experience foreclosure if your math isn’t up to snuff, according to a new research paper from the Atlanta Fed.

Three researchers studied the effect of borrower’s financial literacy and cognitive ability to see what type of role, if any, they played in the mortgage crisis.

They surveyed subprime borrowers who took out mortgages between 2006 and 2007, and found foreclosure starts were approximately two-thirds lower in the group with the highest measured level of numerical ability compared with the group with the lowest measured ability.

Additionally, borrowers in the lowest numerical ability group spent, on average, about 25 percent of the time in delinquency, while borrowers in the highest group were only late on average 12 percent of the time.

The lowest group also missed nearly 15 percent of mortgage payments on average, while the highest group only missed six percent of payments.

Here’s a sample of some of the questions asked:

1. In a sale, a shop is selling all items at half price. Before the sale, a sofa costs $300. How much will it cost in the sale?

2. If the chance of getting a disease is 10 per cent, how many people out of 1,000 would be expected to get the disease?

3. A second hand car dealer is selling a car for $6,000. This is two-thirds of what it cost new. How much did the car cost new?

The researchers said a borrower’s inability to perform simple mathematical calculations likely impacts their ability to manage a budget and may lead to the selection of an unsuitable loan type.

Of course, socioeconomic issues could also be at play; for example, a borrower with poor numerical ability may experience less success in the labor market, and subsequently make less money and be more susceptible to default.

There’s also the thought that borrowers with poor numerical ability may be burdened with debt before even applying for a mortgage.

(photo: lrargerich)

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