OfflineWhen the market bottomed out several years ago due to foreclosures, a lot of it had to with bad loans – no doc loans, adjustable rate mortgages, etc.
However a new study just came out that shows “math-challenged borrowers were five times more likely to default on their loans.”
This was a research project that Stephan Meier, an associate professor of business at Columbia Business School, authored along with economists from the Federal Reserve of Atlanta and the University of Lausanne.
A portion of this study was published on CNNMoney’s website. “Borrowers with poor math skills made up a higher percentage of homeowners in foreclosure during the housing bust than those who were skilled at arithmetic.”
“The study examined several hundred borrowers who held mortgages issued in 2006 and 2007 -- right before the mortgage meltdown. Of the study subjects, 25% of the borrowers who scored in the lowest bracket for math skills had defaulted on mortgage payments within five years of getting the loans. Meanwhile, only 5% of those in the top tier for math skills defaulted.”
“The survey sample included homebuyers from a variety of backgrounds, from blue collar workers to corporate professionals. Their math ability covered the gamut -- from those with very limited abilities to a mathematician with a six-figure salary, according to Kristopher Gerardi, an economist with the Federal Reserve of Atlanta.
The researchers controlled for differences in overall intelligence by measuring for verbal and general IQs, as well as math skills, and controlled for socioeconomic factors, such as age, sex, income, ethnicity and local labor market conditions.”
Well, this isn’t good news for me since I’ve struggled with math from high school through college.
However as I’ve invested I learned how to properly run the numbers on a property, do my due diligence
in order to come up with a calculated offer to submit.
So, as your investing, it has been and will always be wise to know your numbers!
http://money.cnn.com/2013/06/25/real_estate/mortgage-math/index.html
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Some statistics are just logical. If a buyer or homeowner is weak in math, then how will they be able to project what their payment may turn into with an adjustable rate loan? Will they understand what an interest only loan is and how it will affect their debt and loan payoff?
There has been much discussed about lender disclosures and simplification of these documents. The problem is that many borrowers are happy to own homes in ignorance and are unwilling to think of any ramifications other than payment amount.
but... with all the different types of loans that were being offered at the time, I don't think many homebuyers, even with good math skills, could understand...
Valerie
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