Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data

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DIANE Publishing, 2010 - 53 pages
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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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