By Dom Nozzi, AICP
Mortgage lending typically does not consider the financial burden of commuting and other transportation costs for a family living in a remote, single-use (i.e., only residential land use) suburban area.
By living in a house that is remote from jobs, schools, shopping, and recreation/culture means that the household must spend more for transportation — usually by owning a relatively large number of cars. Research by the National Resources Defense Council (NRDC) has shown that a typical family living in a more central location in Oakland drives only half as much as a similar family in a more remote location. The savings were measured at about $750 per month. Others report savings of $300 to $600 per month.
Higher overall payments (travel and mortgage) make the more remote home more risky to the lender than a comparable loan in a more central location.
The hope of groups supporting what are called “location-efficient” mortgages is that the lending formula can be changed so that a dollar a month saved on transportation can be applied to a dollar a month higher loan payment. As a result, families wanting to purchase a home in a more “location efficient” area could qualify for a higher mortgage than a family purchasing a remote, less location-efficient home.
Location-efficient mortgages create a way for banks and mortgage lenders to recognize the transportation savings that an “access rich” central location is able to benefit from. A portion of these savings can be used by such institutions to “stretch” their standard income-to-expenses ratios that are part of the mortgage application process.
Of course, this concept is a powerful affordable housing tool as well. With this approach, like the Energy Star mortgage program (commonly called “energy-efficient mortgages”), a lower income household could qualify for housing that would otherwise be “unaffordable” under conventional lending rules.
Location-efficient mortgages acknowledge that families save money when they “live locally.” Those who shop, work, go to school, and enjoy parks or culture locally don’t need to travel as much because their more compact and populated (location-efficient) area is pedestrian-friendly and amenity-accessible.
In the neighborhood which has good accessibility, residents can walk to the grocery store, ride the bus to work, pick up the laundry on the way home from work, walk to the park on weekends, and bike to the shopping center for weekend errands. Households are more likely to own one car, instead of two or more, and drive less than 900 miles per month.
By contrast, neighborhoods that provide good mobility are ones where residents live in a more sparsely settled area with one-acre lots on cul-de-sacs and other disconnected roads without sidewalks. Households often must depend on two or more cars to provide the mobility tasks that members of the household must deal with — tasks that the “access-rich” households often perform by walking, bicycling, or using the bus. Such households must devote an enormous amount of time to travel by car, which means, among other things, loss of free time, emission of relatively large amounts of air pollution, and consumption of relatively large amounts of gasoline.
Patrick Hare claims he came up with the idea originally. He called it “Near Transit (one car) Mortgages.” His point was that if a household was in a location-efficient area, it would be better able to shed the second household car. By doing so, about $3,000 per year could be saved — which translates into being able to make mortgage payments for a mortgage of about $34,000 with this money saved.
“Location Efficiency” is emphasizes how accessible things like jobs and parks and shopping are, rather than how mobile one must be to find such needed goods and services. A strong correlation has been found between a location-efficient house and how many miles are driven each year and the number of cars owned by a household. The key correlative factors for location efficiency are:
Relatively high residential density
Good access to public transit
Good access to shopping, services, cultural amenities, and schools
Good pedestrian “friendliness” of sidewalks, bikeways, benches, lighting, and plantings
The author of the study that found these correlations states that it is possible to project auto ownership and usage, and thus average travel costs, with good reliability.
The Internet now has something called “Location-Efficient Mortgage Advisor” software that a lender could use to determine mortgage qualification. It contains an area map which shows the location of the property that the hypothetical buyer is considering buying, and any bus stops, train stations, and principal cultural features near the property. It would also indicate walking distances. This information is merged by the software, which then calculates a “Location Efficient Value” (LEV), and enters a predetermined portion of the LEV into the mortgage formula calculation. (For those of you who enjoy playing with mortgage calculations, the Web page I cite below goes into detail that I won’t bore you with about how the “location-efficient mortgage” would work.)
To summarize, the benefits of the location-efficient mortgage are:
Creates affordable housing. Encourages home ownership opportunities for low- and moderate-income households.
Stimulates home purchases in low- and moderate-income urban neighborhoods.
Increases transit ridership.
Promotes infill and establishes a financial disincentive for sprawl
Supports local consumer services and cultural amenities.
Cuts energy consumption
Improves regional and local air quality.
Is all this a pipe dream that is too good to be true? Not at all. It is starting to happen. The Federal National Mortgage Company (“Fannie Mae”) was slated to do a market test of location-efficient mortgages in Chicago in February 1998.
The project is expected to help Fannie Mae achieve its “One Trillion Dollar Commitment” to expanded home ownership opportunities for low- and moderate-income households.
Some of the organizations that are supporting the location-efficient mortgage initiative are:
The Center for Neighborhood Technology
National Resources Defense Council
US Dept of Energy
US Dept of Transportation
Environmental Protection Agency
Surface Transportation Policy Project
Federal Transit Administration
The Chicago Public School System
The Chicago Board of Realtors
Sources for the above info:
Earthword, Issue #4
Center for Neighborhood Technology WWW Page
James “Kim” Hoeveler. 312-278-4800 email: firstname.lastname@example.org
Location-Efficient Mortgage Home Page: http://www.cnt.org/lem/
Patrick Hare 202-269-9334
David Goldstein 415-495-5996