While it is common knowledge that the subprime mortgage crisis brought the world economy to its knees, the mortgage borrowers didn’t do much to help either, a PNAS study reveals.
In explaining the connection between a lower IQ and the likelihood of opting for a foreclosure, the authors of this study, wrote, “This suggests that, holding numerical ability constant, higher IQ does not prevent households from falling behind on payments, but it does help them to avert foreclosure, perhaps because borrowers with higher IQ have better strategic skills.”
While most analysts focus on why money lenders gave money to those borrowers who could be considered risky, the authors of this study were curious to find out why these very borrowers were willing to take loans that they could not repay.
For the study, the authors brought together 339 subprime borrowers from New England and also acquired details as to whether they were able to make their payments or had to foreclose their home.
Interestingly, in order to ascertain whether math literacy could be the cause, they also gave the subjects a survey which tested basic math skills and were consequently split into four groups depending on how well they performed on the survey.
It was found that people with poor math skills fell behind on payments but their IQ and knowledge of fundamental economic principles did not affect their ability to make their payments. Yet those with higher IQs were able to prevent foreclosures.
Alternatively, those with higher IQs were also able to pick mortgages with lower interest rates with the initial interest rate being taken into consideration when taking financial decisions.
The study goes on to conclude that financial education in high school can lead to better decisions in their adulthood, and in the long run, prevent foreclosures as well.