Could poor math skills raise your risk for foreclosure?

Could poor math skills raise your risk for foreclosure?
Study found borrowers who had lower numerical ability were more likely to default on mortgage in tough times.

Borrowers who struggle with math are more likely to fall behind on their mortgage payments and face foreclosure than those who have stronger financial skills, new research suggests.

The study results offer a provocative new reason for the 2008 subprime mortgage crisis: Borrowers who got into trouble weren't simply the victims of tricky or unfair loans. It could have been that they also didn't have the to manage their personal finances through difficult economic times.

"I think this is a very important paper," says Annamaria Lusardi, a professor of economics and accountancy at George Washington University in Washington, D.C.

"We have to make a lot more than in the past, and we have to be equipped to make those decisions," said Lusardi, an expert on who was not involved in the research. "Financial literacy is missing in our schools, and I think as a result, we're not equipped to make decisions about complex financial products."

For the study, which is published in this week's issue of the journal Proceedings of the National Academy of Sciences, researchers used proprietary data collected on subprime mortgage borrowers in New England in 2006 and 2007 to examine the details of the types of loans they took out on their homes and their payment histories.

They then called about 300 of those borrowers and asked questions about their financial situations, including their , age, education, marital status and . They asked a set of questions designed to assess general intelligence. Finally, in a test that might strike fear in the hearts of arithmophobes everywhere, they threw in a set of word problems designed to test a person's ability to do basic calculations.

"There were five questions, and they got more and more complicated," said study author Stephan Meier, an associate professor at Columbia Business School. "The simplest one was: There is a sofa that costs $300 when it's full price, and it's on sale for half the price. How much is it on sale?"

Next up: There's a disease, and the probability of getting the disease is 10 percent. How many people out of 1,000 got the disease?

The researchers found that people with less mathematical ability were more likely to fall behind on their mortgages than those who were better at math. Only 7 percent of people with the highest scores on numerical ability ended up in foreclosure, compared to 20 percent of those who were not as good with numbers.

That was true even when the researchers took into account other factors that might impact a person's ability to pay their bills, such as total income and credit score. In fact, a person's credit score when they took out their mortgage wasn't related to later default.

In the second phase of the study, researchers tried to understand why numerical ability was tied to mortgage default.

"We had this hypothesis that people who are not so good with numbers will have problems with decisions that involve a lot of numbers, which are mortgage choices, which we all know are terribly complicated," Meier said. For example: "Something went wrong when they bought their mortgage. They had too big of a mortgage, they leveraged too much."

But that wasn't what happened.

People with high numerical ability appeared to have the same mortgage terms as those with low numerical ability.

Researchers think borrowers with low numerical skills got into trouble after they took out their mortgages because they weren't able to manage other aspects of their personal finances as well as people who were more comfortable with numbers.

"Say you have a mortgage and suddenly you get hit by an income shock. How you can weather such a shock is that maybe you have some savings on the side ... or you need to re-budget," Meier said. "People who are not so good with numbers may be bad at doing that, and it's really outside the choice."

That's just an educated guess, however. The study wasn't designed to prove that low numerical ability caused people to default on their home loans. It just suggests a relationship between the two. There could be other variables that weren't measured by the study that could have impacted the results.

People who are bad at math can at least take comfort in one finding from the study: Struggling with math doesn't indicate lower intelligence. Numerical ability doesn't seem to be tied to IQ.

Still, the study adds to a growing body of evidence suggesting that the ability to make sound financial decisions is linked to the ability to understand math and be comfortable with certain calculations.

"There's evidence that financial literacy affects behavior in other dimensions, very similar to this one," said Lusardi, who is campaigning to get more schools to add financial literacy to their curricula. "It's important for savings for retirement and for paying off credit cards, and we see the links to financial literacy in those behaviors as well. These things really do matter."

Explore further

Some banks help keep mortgage holders out of default, studies find

More information: "Numerical ability predicts mortgage default," by Kristopher Gerardi, Lorenz Goette, and Stephan Meier. PNAS, 2013.

For more on financial literacy and why it matters, head to the U.S. Department of the Treasury.

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User comments

Jun 24, 2013
Title screams about :"poor math skills"... 1st paragraph declares the issue to be "financial skills", and the lack therof. Are you sure???... maybe it's just laziness, and a failure to read, rather than an inability in any particular "skill"?...

Those two "skills" are perhaps connected, but they are NOT THE SAME!.

This makes about as much sense as Obama's re-election. :(

Jun 24, 2013
If Americans understood simple math then they wouldn't have spent the last 30 years electing borrow and spend Republican Traitors.

Seriously. There are americans on who post here who regularly mistake a static value with a rate of change. Articles written here confuse energy and power.


Jun 24, 2013
In other science news, researchers at Snithoven University have just discovered that people who put their hands in blenders tend to have fewer fingers.

At The Weissman University for the underdeveloped, recent research shows that people who stand up are far more likely to fall down that those who stay seated.

I am Astonished.

Jun 24, 2013
All the thousands of pages of legislation can't fix people so stupid they buy homes, etc. that they really cannot afford. And no I'm not referring to those unfortunates smacked by unanticipated events like major illness, death of an earning spouse and other events beyond control.

Why not return to the paradigm where a buyer puts down 20%? It insures that the buyer was culturally capable of working to save a down payment. The buyer then has skin in the game and won't abandon and trash a 0% down property bought all with other people's money.

Jun 24, 2013
"Why not return to the paradigm where a buyer puts down 20%?" -- Philw

Because the free market always decides what is best for the market and hence for society.

A free market never makes errors and is perfect in every way.

This is true by definition. If there are problems it is by definition the fault of something else.

Jun 25, 2013
Perhaps loan applications will soon include a math test.

And then some enterprising guy will cook up study guides for "passing" your loan application.

Jun 25, 2013
The 2008 mortgage crash was a sad day for the USA and the world. I do not profess to have all the answers but I can tell you a huge part of the problem was and still is, the educational system in the USA and in Canada. Math and Science should be taught by teachers well versed in those disciplines. Sadly that is an ideal position to be realized in both countries. I have been presenting mortgage seminars for over 25 years concerning all aspects of mortgages, loans and interest calculations and the level of ignorance, in both countries, is astonishing!

My favourite line is that there are no frigid women, just lousy lovers. The same can be said of students willing to learn. There are no stupid students who cannot grasp math .. just lousy teachers. Mortgage mathematics should be the last course given to students who complete their grade 12 (in Canada) but its NOT. High School Mathematics and Science too often are options in both countries.
ron cirotto

Jun 29, 2013
I volunteer as a math helper in NH middle schools. One thing that impressed me is a seminar given by the "computer guy" to the kids. Using pages he's linked to various databases, etc. he has kids pick their future profession, look up std salary data, find an apartment in their chosen city, etc. and then do a budget which includes nasty stuff like payroll withholding taxes. Kids invariably overspend on nice places in high cost cities and go ballistic with the tax bite as reality intrudes.

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