In Which I Say ‘Well, Maybe’…


Adam Ozimek wonders:

Provocative question of the day: should mortgage applications come with a short IQ test, where potential borrowers receiving a score below a certain level are required to undergo extensive counseling to make sure they fully and completely understand the mortgage, payment schedule, and the all the issues it is assumed a borrower should understand?

I’m confident that Adam recognizes the fact that, hyperbolic discounting being the problem, this would de facto exclude all but the most determined of those who lack basic arithmetic skills. But still there is a chance that people will put off their instantly-gratifying ways just long enough to get a loan, take the bad loan due to the stronger effect of larger monetary gain, and end up in the same boat. Fortunately, they will be able to draw out an amortization schedule that shows exactly where they went wrong. Unfortunately, they will have still gone wrong.

AND, given a central bank unwilling to satisfy AD, they will still have “caused” a deep recession.

As long as we’re being overtly paternalistic, why not just push for an 80%/20% loan-to-value rule? In fact, codify it into stone (for real; Kaufman, Levin, and Sanders can do the chiseling, because they’re morons). Thus we have a real barrier: the ability to save 20% on a down payment. That involves a much more serious time commitment — much longer than a 4-week math course — and it also involves a savings commitment.

Doubleplusgood as far as safeguards go.

Plus by using the impersonal price mechanism, we avoid the entire debate about the relevance to IQ to intelligence. Admittedly, we do dive headfirst into the homeownership/equity debate.

Oh the trade-offs!

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6 thoughts on “In Which I Say ‘Well, Maybe’…

  1. I think those are all good objections. Since the study I cited controlled for high discount rates and still found this large numeracy problem, any attempt to counter the numeracy problem should make sure it is not just a proxy for filtering out people with high discount rates. Say it was only an extra two hours spent entirely on walking borrowers them through the basic arithmetic. It takes many hours of searching, negotiating, and paperwork to buy a house even from low doc lenders, so an extra two hours shouldn’t dissuade many people on the basis of time commitment alone. Would you object to that?

  2. I wouldn’t object to it, no. I wouldn’t object to a more in-depth math requirement either, really.

    I just think an 80/20 rule would accomplish the same goal in a tidier fashion. It’s even possible that given such a rule, business plans would evolve that take into consideration discounting AND math, and help incentivize people along the way toward their down payment (being as their lending institution would likely be their depository institution as well).

    1. But the 80/20 rule would be less efficient. Some people who are capable of taking out and paying off 100% LTV loans would not be willing or able to do 80% LTV loans, and they would be pushed out of the market. There are even people who, a priori, we could all agree should be given 100% LTV loans… say a married couple of doctors who just graduated med school and have no savings but are about to make $300k a year. Why shouldn’t they be given a loan?

  3. I understand the logic behind the IQ requirement but it wouldn’t fly. Politicians who try to rectify such policy would get lynched for creating a system that would offend. Take, also, the fact that while intelligence helps, intelligence doesn’t necessarily lead to prudence. I’ve known people who’d barely challenge a porous rock in IQ but are very capable of managing their money. Managing personal finance doesn’t take much more than a penny’s worth of brain cells and the will power to not be a spendthrift.

    The 80/20 rule would probably be much safer and likelier to go into law and effect. It would directly deal with the real problem: inability to manage money.

  4. The math requirement is silly in that it requires unnecessary additional costs. Meanwhile, the 80/20 rule is a far more practical rule that controls for numeracy/discipline as well as financial means. It’s unfortunate that the mortgage world ever strayed from this rule.

  5. Likewise, I would like to explain that most buyers already get an amortization schedule anyway.

    I really don’t think numeracy is necessarily the issue here so much as asset deflation. When the principal of the loan is higher than the market value of the asset, any smart person isn’t going to hold onto too long, unless they have a very long term (hypobolic?) attitude.

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