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Home Owners Are More Likely to Lose their Home for…Poor Math Skills?

MB_2012Sep-Bad-at-Math

Apparently math skills were quite necessary in high school, and more importantly, during the recent housing crisis. Who knew that failing high school algebra may actually contribute towards the loss of your home?

A new study finds that home owners who struggle in arithmetic are five times more likely to default on their loans and end in foreclosure, by comparison to those who are actually good at math. “Whether you’re good with numbers predicts how likely you are to default,” says Stephan Meier, an associate professor of business at Columbia Business School, and one of the authors of the report.

This particular study examined a few hundred mortgage borrowers in 2006 and 2007 — right before the housing crisis began. Nearly 25% of the borrowers, who scored in the lowest bracket for math proficiency had actually defaulted on mortgage payments within 5 years of obtaining the mortgage loans. Meanwhile, only 5% of the top tier applicants with great math skills had defaulted.

There are several variables that may have influenced the results, such as socioeconomic factors. But researchers attempted to control those differences by collecting borrowers from all walks of life, blue collar, while collar, low-income to higher-income, ethnicity, overall intelligence, and so on. Yet the question remains: Are these mortgage borrowers actually miscalculating numbers or it is merely disorganization?

Determining why will take more research, but it seems that the underlying thread is “When bad events happened, they don’t react optimally,” said Meier. Whatever that means. However the report says that borrowers could benefit from improved financial education.

READ: Homebuyers clueless about mortgages

 

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