The New York Times
By: Bob Tedeschi
June 13, 2010
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.''
Mr. Tracy said that although he believed financial literacy and math skills were important predictors of a borrower's ability to pay, borrowers deficient in those respects would most likely also have weak credit scores.
Jacqui Atcheson, a senior loan officer with Prospect Mortgage of Sherman Oaks, Calif., said that she worked closely on budgeting possibilities with any borrower whose credit history was checkered. She added that she would not offer a loan to a borrower she found lacking in the mathematical or financial skills needed to pay it back, even if the borrower could qualify for a mortgage.
Eileen Anderson, a senior vice president of the Community Development Corporation of Long Island, a nonprofit housing organization, says her group counsels struggling borrowers through the foreclosure-avoidance process. ''Many of them don't understand how to do a budget -- which is basic math, I guess,'' she said.
Borrowers who receive prepurchase buyer education are less likely to end up in foreclosure than those who do not, she added.
''In our programs,'' Ms. Anderson said, ''we're doing the math with them, not for them.''
And better-educated borrowers are not exempt, either.
''People say they're doctors, so they don't really need it,'' she said. ''So what? We see doctors who took out loans they didn't understand, and who are in foreclosure now.''