Education Levels and Mortgage Application Outcomes: Evidence of Financial Literacy

This paper uses 2005 Home Mortgage Disclosure Act data aggregated by census tract to measure the relationship between census tract-level college completion rates and the rates at which first lien refinance mortgage applicants submit incomplete loan applications, withdraw loan applications before they are reviewed, and reject lender approved loan offers. This paper also explores the relationship between tract-level college completion rates and the mean interest rate borrowers received for a subset of high-cost loans. The results indicate that first lien refinance loan applicants in tracts with higher rates of college completion are less likely to submit incomplete applications, to withdraw applications before they are reviewed by the lender, and to reject lender-approved loan offers. Tracts with higher rates of college completion pay lower mean interest rates as reported by lenders for high-cost loans. Consumers in census tracts with lower rates of college completion may engage in different search strategies for mortgage credit options than consumers in tracts with higher college completion rates. To the extent education is correlated with financial capability, these findings suggest loan applicants with lower educational attainment lack financial literacy concerning refinance mortgage application search strategies.