Poor Math Skills Predict Your Risk of Mortgage Default

People with poor math skills have a higher chance of defaulting on their mortgage. That statement may sound like a reasonable hunch. But now it’s also the findings of a study published Monday by the Proceedings of the National Academy of Sciences. The one sentence summary:

“This paper presents empirical evidence showing that the ability to perform basic mathematical calculations is negatively associated with the propensity to default on one’s mortgage.”

The study was initially inspired by the financial meltdown in 2007 that led to the 2008 subprime mortgage crisis. Many of the borrowers who lost their homes were clearly victims of ridiculous lending contracts that meant they couldn’t reasonably expect to be able to repay their loans.

At one point during the crisis, over half of the subprime mortgages made in the United States were in default.

However, not every subprime borrower lost their home. What made the difference? According to this study, the borrower’s math skills predicted whether or not she would default on her mortgage.

The researchers tested over 300 people who made subprime loans during 2006-2007 on general intelligence as well as their ability to perform basic calculations. And we’re talking really basic math questions here, folks.

Study author Stephan Meier was quoted in Phys.org as saying that the first question 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?”

Gosh. If you can’t answer that question, yah, it should probably be a federal crime to loan you money.

Discover looked at the study and noted that people with high IQs were just as likely to fall behind on their loans as people with lower IQs, but they still didn’t default on their mortgage as often. Hmm. Reporter Gemma Tarlach wrote, ” [G] greater cognitive abilities may have helped some borrowers find a way out of delinquency.”

I think she’s saying that the smarter person might find it easier to get a second job or figure out another way to earn extra money to climb out of the hole. Or maybe they can just see the train coming down the tunnel from a further distance, giving them time to sell the house before the bank takes it away from them.

And yes, people with high IQs can still have poor math skills. Apparently, it’s a different part of the brain that handles those pesky math questions.

The researchers stressed that they didn’t find any evidence that people with poor math skills were more likely to get horrible loans in the first place. That surprised me, since I would have guessed that those people would be easier to victimize with predatory loans.

So will brushing up on your math skills make you less likely to default on your mortgage in a future foreclosure crisis? It probably can’t hurt.

[image by Voronin76 via Shutterstock]