A financial break for living in the right place?

Hopes rise for location-efficient mortgages, which in limited tests have bucked the nationwide wave of bad housing debt by producing no known foreclosures.

The idea of offering bigger mortgages to people who buy homes where they can walk, bicycle, or ride mass transit to their daily destinations has gained increasing support in the past few months.
Scott Bernstein, president of the Chicago-based Center for Neighborhood Technology (CNT), believes “location-efficient mortgages,” or LEMs, could be on the verge of becoming widely available next year. The reasons are several.

First, in the few cities that have experimented with such mortgages since 2001, not a single participating home has gone into foreclosure, according to Bernstein. Of the 41 LEMs in Chicago and the 24 LEMs in Seattle (all granted between 2001 and 2004), there have been no delinquencies, defaults, or foreclosures, he says.

Of the 100 “Smart Commute Mortgages” (similar to LEMs) written in San Antonio, there have been no defaults or foreclosures. Of the 53 “Take the T Home Mortgages” granted in Boston, only one went into default, but it was remedied by restructuring the loan, thus giving the Boston program a foreclosure-free record as well.

This is admittedly a tiny group of mortgages from which to draw national conclusions, but Bernstein believes it indicates the idea’s soundness. (Experimental LEM programs were also conducted in San Francisco and Los Angeles, but Bernstein says it was impossible to track the performance of the mortgages in those cities.)

Second, the recent rash of foreclosures on subprime and other kinds of mortgages has shown that location does make a difference. In distant suburbs, a sizable number of homeowners have been unable to keep up with the combined burden of housing expenses and car expenses. In convenient, walkable, transit-accessible neighborhoods, CNT research suggests that people often have lower combined housing and transportation expenses — and thus may be better mortgage risks.

Third, the housing bail-out legislation enacted by Congress in August called for making “energy-efficient mortgages” (bigger mortgages for houses designed to conserve energy) much more common. Bernstein says that provision “could be interpreted as including LEMs.”

Fourth, a bill sponsored by Rep. Ed Perlmutter, D-Colorado, that would require Fannie Mae and Freddie Mac to finance location-efficient and energy-efficient mortgages was passed by the House this fall. The Senate did not act on it, but Perlmutter intends to try again, and thinks it may become law in the next Congress, where the Democratic majorities will be larger.

Fifth, proponents of LEMs are hoping for a positive reception from the Obama administration. “There’s a fair chance for next year,” Bernstein says of the prospects that the federal government will “scale up” LEMs in 2009.

Changing underwriting
Standard loan underwriting views buyers as being able to afford to spend 28 percent of their gross income on mortgage payments. LEMs boost this to 39 percent by recognizing that the homeowners in convenient locations can significantly reduce their transportation expenses. This could let people buy $12,000 to $50,000 more house if it’s in a walkable, transit-accessible neighborhood.

CNT says that by drawing on land-use information such as population density and public transit locations, and on census information on car ownership and driving levels, it is now feasible for a lender to predict how much a household in a particular location will spend on transportation. That doesn’t guarantee that a couple in a close-in, walkable neighborhood would drive less. A Web search by New Urban News turned up a 2005 University of Minnesota study by Kevin Krizek that raises some doubt.

Krizek interviewed recipients of these mortgages in Chicago and Seattle. He found a relatively high proportion of the homeowners owned more than one car — and drove more than one car at least five days a week. Several of those homeowners decided where to live on the basis of “familiarity, sentimental attachment, and proximity to friends and family,” not because a walkable, transit-served neighborhood would allow them to do without one or two vehicles.

Some proponents of LEMs say the mortgage should come with a transit pass; that might increase the likelihood that people would use their cars less.

Last June, Bernstein testified to Congress that after the first year of the LEM program’s operation in Chicago, “it appeared that 30 percent of the borrowers had sold one or more automobiles.” He says a study of the Chicago recipients found a significant reduction in vehicle miles traveled.

Indeed, CNT has carried out a study of millions of households and their travel behavior, correlating the findings with neighborhood characteristics and other factors. The result, Bernstein says, is a sophisticated calculation of how much driving people do from different kinds of places.

Cheap gas
As of mid-November, the US average gasoline price had dropped to $2.18 a gallon, down by almost half from its July peak. Doesn’t this take the ground out from under the location-efficient mortgage? Bernstein says no. He points out that gasoline is only a small part of the cost of auto ownership. The average “fixed” cost of owning a car — in which the purchase cost and financing charges loom large —  is $5,078 a year. Own two cars, and you’re paying $10,156 a year — even before you fuel them.

“Most suburban households earning $50,000 or less are paying as much or more for transportation as for shelter,” he says. And there’s no assurance that gasoline prices will stay down for long. “Most people think we’ll be back on a price escalation curve in a year or less,” he says.

Consequently, Bernstein believes the rationale for encouraging people to buy homes in places where they can walk or take public transportation to many of their daily needs remains strong. “I think there’s an opening here to make location-efficient mortgages universally available.”