Math Deficiencies Increase Foreclosure Risk

CUNA’s E-Scan Website
July 20, 2010 | COMMENTS

If you can't divide 300 by 2, should you qualify for a loan?

That's one of the questions raised in a new study from Columbia University, which found that borrowers with poor math skills were three times more likely than others to go into foreclosure.

The study has at least two implications for mortgage lenders, study author Stephan Meier, Columbia assistant business professor, told The New York Times. One would be to “start adding math tests to the process,” he said, “and screen them away.”

The alternative would be working to help borrowers improve their financial literacy before they took out the loan.

“There are a lot of financial decisions you have to make as a homeowner,” Meier noted, “but some of the more difficult decisions have to do with how to rebudget if you're hit by an income shock, which a lot of people had to do during the recession.”

Mortgage lenders and counselors agree that it's difficult to gauge a borrower's math skills under the current mortgage-application system.

Numerical ability, of course, is only one aspect of financial literacy, but it's strongly linked to mortgage default and other personal-finance difficulties. Also, borrowers deficient in financial literacy and math skills would most likely have weak credit scores.

Pre-purchase buyer education helps prevent borrowers from ending up in foreclosure, according to Eileen Anderson, senior vice president of the nonprofit Community Development Corporation of Long Island. Anderson 's firm counsels struggling borrowers through the foreclosure-avoidance process. “Many of them don't understand how to do a budget,” she said. “In our programs, we're doing the math with them, not for them.”

Better-educated borrowers aren't exempt, either. “People say they're doctors, so they don't really need it,” Anderson said. “But we see doctors who took out loans they didn't understand, and who are in foreclosure now.”

In Meier's survey, 340 borrowers who took out subprime loans in 2006 and 2007 were surveyed in 2008. None were in foreclosure. Twenty-one percent of respondents whose math abilities placed them in the bottom quarter of the survey went on to experience foreclosure, versus 7% of those in the top quarter.

The fact that the borrowers in the sample had subprime loans did not lessen the significance of the findings, according to Meier. A larger survey in Britain found nearly the same levels of math illiteracy among those questioned about retirement savings.

This article originally appeared on CUNA's E-Scan Online Research & Advice Portal. Reprinted with permission.