Financial literacy, risky mortgages, and delinquency in the US during the financial crisis

Abstract

Purpose The purpose of this paper is to evaluate whether low financial literacy is associated with the use of risky mortgages and delinquency. Design/methodology/approach A probit analysis is used to analyze the results of a survey of US homeowners. Findings It was found that borrowers with low financial literacy are more likely to have a risky mortgage and be delinquent in their mortgage payments. Originality/value The results indicate that many risky loan borrowers may be unable to evaluate the risks inherent in the mortgage, which contributes to high delinquency rates. These results suggest the need for education and caution in the use of risky mortgages.