Location efficiency lowers mortgage defaults, researchers find

Mortgages are more likely to default as household car ownership rises and as Walk Score declines, researchers find.

The Journal of Sustainable Real Estate article, "Location Efficiency and Mortgage Default," by  Stephanie Y. Rauterkus, Grant I. Thrall, and Eric Hangen, looked at three geographically and economically diverse cities: Jacksonville, Florida; Chicago, Illinois; and San Francisco, California. San Francisco has double the average income of Jacksonville, while Chicago falls in between, the researchers note.

San Francisco has the top Walk Score in the nation among large cities, with an average score of 86. Chicago is somewhat less walkable, but near the top, with a Walkscore of 76. Both San Francisco and Chicago are made up of primarily walkable urban fabric. Jacksonville, conversely, is mostly suburban. It's Walkscore of 36 is among the lowest of big cities.

"We find that default probability increases with the number of vehicles owned after controlling for income," the article states. "Further, we find that default probability decreases with higher Walk Scores in high income areas but increases with higher Walk Scores in low income areas."

The impact of location efficiency (as measured by income-normalized vehicle ownership) on default is nontrivial, says the article. "Consider the following example, of a borrower in Chicago with a [credit] score of 680, a debt-to-income (back end) ratio of 41 percent, and an [loan-to-value ratio] of 80 percent. If the borrower is purchasing a home of average location efficiency for the Chicago metro area, our model return default probability is 9.9 percent. A second borrower could have exactly the same underwriting characteristics but purchase a location-efficient home. The default probability for this borrower falls to 7.2 percent. A third borrower with the same credit score and LTV could have a remarkably higher debt-to-income ratio, of 62.5 percent, and, if they purchased the location-efficient home, the model would return a default probability of 9.9 percent — the same probability as for our first borrower.

The authors hypothesize that mortgage default could be positively affected by location efficiency because transportation costs decline in walkable locations. They add that transportation choice also could insulate borrowers from the affects of gasoline price spikes, such as those that occurred in 2008 and prior to the financial meltdown.

However, the superior perfomance of the underlying real estate could also explain the difference. "This explanation is that location efficient homes might hold their value better than other homes, and therefore better enable borrowers to avoid foreclosure through alternative measures (such as selling or refinancing the home) if they fall behind on payments or need to manage payment shock from an adjustable rate mortgage," they write.

One caveat to the findings is that, in Jacksonville and San Francisco in particular, high Walkscores were associated with greater defaults for low-income residents. "We interpret this to mean that low-income, high default rate areas tend to be quite walkable (e.g., in urban areas within the central city). At the other extreme, we find that in high-income neighborhoods, Walk Score is negatively related to mortgage default. We interpret this as more of a location efficiency effect, with the causality flowing in the opposite direction as in low-income neighborhoods. That is, in high-income, walkable neighborhoods, borrowers have lower transportation costs and thus have more funds available to cover debt service thereby lessening the likelihood of default."

Lower vehicle ownership was associated with lower default across all income groups.

The researchers note: "These results suggest that some degree of greater mortgage underwriting flexibility could be provided to assist households with the purchase of location efficient homes, without increasing mortgage default. They also support the notion that government policies around land use, zoning, infrastructure, and transportation could have significant impacts on mortgage default rates."

Download a pdf of the study below.