IN HINDSIGHT one of the worst things about America’s subprime housing bust is how predictable it was. Subprime borrowers were by definition people of limited means with poor credit histories. Yet economists who have looked at the pattern of payments on subprime mortgages point out that even when house prices topped out and then began to fall, not all subprime borrowers defaulted. Only a minority of borrowers abruptly ceased to make payments, as someone choosing to default would.
More typically, payments went from being regular to being erratic: borrowers fell behind, then became current again, only to fall behind once more. Those patterns are indicative of people trying, but struggling, to keep up with their payments. A trio of economists set out to find out what differentiated those borrowers who did not keep up with their payments from the rest. Their answer, according to a new working paper from the Federal Reserve Bank of Atlanta, is simple: numeracy.
That's right--math knowledge.