Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data
DIANE Publishing, 2010 - 53 pages
This paper investigates whether a particular aspect of borrowers' financial literacy ¿ their numerical ability ¿ may have played a role in the subprime mortgage delinquency. The authors measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out mortgages in 2006 or 2007 and match these measures to objective data on mortgage characteristics and repayment performance. They find a large and statistically significant negative correlation between numerical ability and various measures of delinquency and default. These results raise the possibility that limitations in certain aspects of financial literacy played an important role in the subprime mortgage crisis. Charts and tables.
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0.01 are equal ability and delinquency aﬀect aspect of ﬁnancial Banks and Oldﬁeld borrower’s coeﬃcient cognitive ability Cold-calls control variables correlation between numerical credit score Debt-to-Income Ratio delinquency and default diﬀerences discount factor Dohmen economic literacy eﬀect F-test FICO score ﬁnancial literacy ﬁnancial situation ﬁnd ﬁrst ﬁve ﬁxed Fraction of Payments house prices Initial interest rate Loan-to-Value Ratio Lorenz Goette LP dataset Lusardi and Mitchell measure of cognitive measure of ﬁnancial measures of delinquency mortgage default mortgage delinquency mortgage market mortgage payments mortgage repayment behavior numerical ability group Numerical Ability Index omitted variables p-value percent percentage phone numbers point estimate poor numerical ability preference parameters probit model quartile questions reﬁnance Regression reported in columns response risk aversion risk preferences Robert Shiller Robust standard errors sample selection set of control signiﬁcantly speciﬁcation statistically signiﬁcant subprime borrowers subprime mortgage borrowers survey sample Table verbal IQ measure Yes Yes Yes