Monday, April 26, 2010

The mortgage meltdown---it is Economics teachers fault!! I take full responsibility....

The mortgage meltdown---it is Economics teachers fault!!  I take responsibility..Well, not entirely my fault, but if I were paranoid, the implication is clear...

Did financial illiteracy contribute to subprime crisis?
...To translate that back into English, borrowers with the most financial literacy were two-thirds less likely to be in foreclosure than borrowers with the least financial literacy. That result remained even after controlling for demographic characteristics such as education and income and the specific mortgages both groups signed. Bottom line: "Twenty percent of the borrowers in the bottom quartile of our financial literacy index have experienced foreclosure, compared to only 5 percent of those in the top quartile. Furthermore, borrowers in the bottom quartile of the index are behind on their mortgage payments 25 percent of the time, while those in the top quartile are behind approximately 10 percent of the time."

What seems to be happening here is not that folks who are financially illiterate choose worse mortgages so much as folks who are financially illiterate make more financial mistakes once they have their mortgages. Either way, it's a reminder of the extraordinary asymmetry of information that stands between borrowers and lenders. You can download the full paper here (pdf).
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