Subprime borrowers need math primer

It must be about two years now. Banco Santander chief executive Alfredo Saenz said in an interview that the reason why his bank largely escaped the darker aspect of the credit crisis was because he refused to sell anything that he himself wouldn’t buy. On Monday, Kris Gerardi, an economist in the Federal Reserve Bank of Atlanta research department, discussed the connection between financial literacy and the likelihood of buying a house using a subprime mortgage. Gerardi stopped short of lobbing any clear accusation on mortgage-origination practices and instead said his recent research results are basically empirical evidence meant to be used in a going-forward kind of capacity. Although, “a necessary condition of predatory lending would be an inability to comprehend mortgage terms” he said. “We found the ability to perform simple mathematical calculations, which we referred to as numerical ability, is negatively correlated with the incidence and extent of mortgage delinquency,” he said. But don’t blame the product. Gerardi says that it’s a condition of poor financial literacy: to not want to put money down today, even if it means less money going out in the future. Gerardi and his team performed random telephone interviews in order to get his results, which he discusses on a podcast page for the Atlanta Fed. Numerical ability involves five simple math problems. The first four are simple, Gerardi explains, but the fifth has to do with inflation and interest cognition and that one determines the financial literacy. So here’s the obvious question – putting aside Dodd-Frank, consumer protection, etc. – isn’t it easier to require potential borrowers to pass this test? Jacob Gaffney is the editor of HousingWire. Write to him.