Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data ∗ (2010)
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BibTeX
@MISC{Gerardi10financialliteracy,
author = {Kristopher Gerardi and Lorenz Goette and Stephan Meier},
title = {Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data ∗},
year = {2010}
}
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Abstract
The exact cause of the massive defaults and foreclosures in the U.S. subprime mortgage market is still unclear. This paper investigates whether a particular aspect of borrowers ’ financial literacy, their numerical ability, may have played a role. We measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out mortgages in 2006 and 2007, and match these measures to objective data on mortgage characteristics and repayment performance. We find a large and statistically significant negative correlation between numerical ability and various measures of delinquency and default. Foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared to the group with the lowest measured level. The result is robust to controlling for a broad set of socio-demographic variables and is not driven by other aspects of cognitive ability, or the characteristics of the mortgage contracts. Our results raise the possibility that limitations in certain aspects of financial literacy played an important role in the subprime mortgage crisis.
Keyphrases
financial literacy subprime mortgage delinquency survey matched administrative data numerical ability measured level cognitive ability important role socio-demographic variable particular aspect various measure broad set certain aspect borrower financial literacy foreclosure start mortgage contract u.s. subprime mortgage market repayment performance significant negative correlation subprime mortgage crisis subprime mortgage borrower exact cause massive default several aspect mortgage characteristic
