Helaine’s Blog

What caused the subprime mortgage crisis? Not our math skills

July 3rd, 2013 | via The Guardian

A paper published this week claims that the less competent at math, the more likely one is to default on mortgage in 2006-2007

There’s a new culprit to blame for the subprime mortgage crisis.

Math – specifically, our lack of ability in it.

This news comes courtesy of a paper published earlier this week in the Proceedings of the National Academy of Sciences. A group of researchers determined that the less competent at math, the more one was likely to default on a mortgage underwritten in the years 2006 and 2007. That finding held true regardless of whether one had a subprime or plain vanilla mortgage.

So what does this mean? If you can’t figure out how to perform a simple exercise in how to determine compound interest, are you supposed to skip the buying process and just rent?

Not so fast. The paper’s authors have a solution “Financial education of homeowners,” they proclaim.

Ah. Financial literacy, of course that’s the answer. Never mind the banksters handing out the loans or the ratings agencies rating them – whose own math skills were so subpar they apparently couldn’t figure out that a pile of subprime liar loans do not a Triple A Rating make. Never mind the mortgage brokers for firms like Countrywide Financial, who encouraged wannabe homeowners to, er, exaggerate their earnings. Never mind the legions of people – some of them my colleagues in the financial media – who proclaimed “this time it’s different” and urged everyone to buy a home just as soon as they could, even if they were in mounds of debt and couldn’t come up with even a minuscule down payment.

And never mind the fact that, as of now, no one has figured out a financial literacy program that, you know, actually works.

No, we’re going to teach our homebuyers some last-minute math.

Before I get started, let me just point out that even the commenters at the Wall Street Journal’s website – not exactly known as an empathetic bunch when it comes to Americans and their finances – weren’t buying it. “These bankers must be even dumber at math since they gave these people money,” was a sample comment. ‘This study is like measuring the mathematical skills of people who bought lemon automobiles,” wrote another.

See, there is a basic problem here. Americans have never been known for their stellar math abilities. According to my favorite education blogger, Valerie Strauss at the Washington Post, international comparisons of high school students’ math skills put the United States in last place in 1965 and in the 1980s.

Here’s the paradox. During that time, as our math skills declined, we did not have a mortgage crisis so severe that it almost imploded the world economy. So the odds are pretty decent that a paucity of math skills did not cause the current crisis. Otherwise, it would have occurred much, much sooner.

Something else, however, did change between that period and the times we live in. It was this: how you got a loan to buy a home.

Once upon a time, you see, a wannabe homeowner walked into a bank, sat down with a banker, and applied for a mortgage. It was certainly not a perfect system – black families, for one, had a harder time obtaining mortgages than white ones – but it did ensure that a human was making something of an informed judgment on the applicant’s ability to make their monthly payment.

In other words, there was a sense we were all in this together.

The authors of this study, whether they mean to or not, are falling into a meme that’s become all too prevalent in recent years. They are, as I told Time magazine when they interviewed me about this study, “looking for individual solutions for global problems.”

Now if the authors of this study want to go on television and use their findings to argue for increased education financing for math education in the United States, I’m on their side. I suspect there’s a lot more to gain from that than just reducing the mortgage default rate.

But if they are simply looking to bring down the foreclosure rate, I feel certain there are easier ways to go about it then taking on the task of improving the math skills of Americans. After all, we’ve been working on that one for as long as I’ve been alive – with very little to show for it.

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