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Study Says Math Deficiencies Increase Foreclosure Risk

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http://www.nytimes.com/2010/06/13/realestate/13mort.html?ref=business

IF you can’t divide 300 by 2, should you qualify for a loan?

That is one of the questions raised by a new study led by a Columbia University assistant business professor, Stephan Meier, who found that borrowers with poor math skills were three times more likely than others to go into foreclosure.

Mr. Meier conceded that the results were not shocking, but he said he had not expected the connection between math skills and mortgage default to be so pronounced.

About 340 borrowers in Connecticut, Massachusetts and Rhode Island who took out subprime loans in 2006 and 2007 were surveyed in 2008. None were in foreclosure.

The respondents were asked five questions, with the first requiring borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000. (Since the survey was conducted by telephone, the questioners did not know who was using a calculator.)

About 16 percent of the respondents answered at least one of the first two questions incorrectly. Mr. Meier said that the results were consistent among all levels of education and income.

Over all, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter.

Mr. Meier said the fact that the borrowers in the sample had subprime loans — which in 2006 and 2007 were given even to those with dismal financial histories — did not lessen the significance of the findings. A larger survey in Britain, he said, found nearly the same levels of math illiteracy among those questioned about retirement savings.

Mr. Meier said the study had at least two implications for mortgage lenders. “Maybe start adding math tests to the process,” he said, “and screen them away.”

The other alternative, he said, 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,” he 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, brokers and counselors mostly agree that it’s difficult to gauge a borrower’s math skills under the current mortgage-application system.

“A lot of payment numbers are discussed,” said Richard L. Tracy Jr., the chief executive of Campbell Mortgage in West Haven, Conn., “but by that time the computer programs have already done the math.”

A point which isn't tackled in this article is whether the lack of maths skills allowed the bank employee to bamboozle these people with numbers to get them to sign on the dotted line.

Although having a maths test would pose problems because what's the betting many mortgage advisor's would help them in the test to ensure they got the loan they deserved?

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http://www.nytimes.c...ml?ref=business

A point which isn't tackled in this article is whether the lack of maths skills allowed the bank employee to bamboozle these people with numbers to get them to sign on the dotted line.

Although having a maths test would pose problems because what's the betting many mortgage advisor's would help them in the test to ensure they got the loan they deserved?

What about being able to read?

maybe that was a more important factor. Or lying to a client and keeping a straight face above the expensive suit and tie.

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Why don't they just say test scores in the lower quartile are three times more likely to foreclose than those in the upper quartile in a sample of 340.

Because that is equivalent to saying the Relative risk is 3. Relative risk is fine, but can be highly misleading - if you don't know the absolute values - both measures may be negligibly small.

The abslute risks (7% and 21%) are more useful in this case - as it indicates just how severe the risk is. In this case, an additional 1:7 people will be foreclosed if their maths skills are in the lower quartile.

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Because that is equivalent to saying the Relative risk is 3. Relative risk is fine, but can be highly misleading - if you don't know the absolute values - both measures may be negligibly small.

The abslute risks (7% and 21%) are more useful in this case - as it indicates just how severe the risk is. In this case, an additional 1:7 people will be foreclosed if their maths skills are in the lower quartile.

It may not be as exciting, but surely we are more interested in comparing the lower 25% with the middle 50%.

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http://www.nytimes.com/2010/06/13/realestate/13mort.html?ref=business

A point which isn't tackled in this article is whether the lack of maths skills allowed the bank employee to bamboozle these people with numbers to get them to sign on the dotted line.

Although having a maths test would pose problems because what's the betting many mortgage advisor's would help them in the test to ensure they got the loan they deserved?

Mr. Meier suggested “Maybe start adding math tests to the process, and screen them away.”

I think that is too strong, and unfair to block these people from home ownership for life. But perhaps they should be limited to a lower Loan To Value (LTV), to a degree where the risk is counterbalanced. I am sure they have data on default rates in relation to LTVs.

.

Edited by Tired of Waiting

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I have some sympathy for this. I remember hearing someone in a pub saying that if interest rates went up he'd be fine, after all even a 7% increase on 1000 a month mortgage only brings it up to 1070. It would be tough but maybe he could give up takeaways! That was his margin for error, if interest rates jumped to 12% (from 5%) he was going to have to give up takeaways... :rolleyes: And a bank had loaned him what, £200,000 based on his steely-eyed business acumen?

Edited by Cogs

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Study Says Math Deficiencies Increase Foreclosure Risk

What do you expect given the only vaguely rigourous thinking required during the noughties was confined to shampoo ads:

http://www.youtube.com/watch?v=Yz4AiiN0mVQ&feature=related

"Here comes the science"

L'Oreal are at it again with their current "Inspired By The Science Of Genes" campaign.

Edited by Dave Spart

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Mr. Meier suggested Maybe start adding math tests to the process, and screen them away.

I think that is too strong, and unfair to block these people from home ownership for life. But perhaps they should be limited to a lower Loan To Value (LTV), to a degree where the risk is counterbalanced. I am sure they have data on default rates in relation to LTVs.

I don't see why you shouldn't be required to show some numerical skills to get a mortgage; you have to pass two rigourous tests to obtain a driving licence. Millions of people happily manage this every year and the result is that we have among the safest roads in the world. The same can't be said of our banking system.

With great power comes great responsbility.

Edited by Dave Spart

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