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Financial Literacy and Subprime Mortgages in Massachusetts

In a recent study economists found a “large and statistically significant negative correlation” between financial literacy and subprime mortgage defaults. In our opinion, the ramifications run deeper than putting a new agency under the Federal Reserve Bank, the so called Financial Reform Act. Our clients, more and more, are asked to manage their retirement accounts (401k, 403b, IRA, etc.), and to make non-retirement savings decisions. Indeed, the economists stated: “Of even greater concern however, is that differences in financial literacy are correlated with consumption and savings decisions.”

The study is replete with statistics and interesting findings. For example, the folks at the bottom 25% of calculation skills, 20% had been foreclosed on; whereas, only there were only 5% of foreclosures in the folks who scored in the top 25%. The work was published by the Federal Reserve Bank of Atlanta (with research from the Boston Federal Reserve Bank).