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

Federal Reserve Bank of Atlanta Working Paper Series No. 2010-10

54 Pages Posted: 6 May 2010

See all articles by Kristopher Gerardi

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Lorenz Goette

University of Lausanne; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Stephan Meier

Federal Reserve Bank of Boston; IZA Institute of Labor Economics; Columbia Business School - Management

Date Written: April 1, 2010

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 or 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 with the group with the lowest measured level. The result is robust to controlling for a broad set of sociodemographic variables and 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.

Keywords: subprime mortgage, delinquency, default, financial literacy, cognitive ability, survey

JEL Classification: R2, D1, D8

Suggested Citation

Gerardi, Kristopher S. and Goette, Lorenz F. and Meier, Stephan, Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data (April 1, 2010). Federal Reserve Bank of Atlanta Working Paper Series No. 2010-10. Available at SSRN: https://ssrn.com/abstract=1600905 or http://dx.doi.org/10.2139/ssrn.1600905

Kristopher S. Gerardi (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Lorenz F. Goette

University of Lausanne ( email )

Department of Economics
Batiment Internef
Lausanne, 1015
Switzerland
(021) 692'3496 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org

Stephan Meier

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Columbia Business School - Management ( email )

3022 Broadway
New York, NY 10027
United States

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