Efficient Locations Lead to More Secure Mortgages: The Evidence Mounts Up


Fannie Mae’s recent findings that property owners with apartment buildings located in walkable, transit-friendly neighborhoods are less likely to default on their mortgages parallels a smaller, NRDC-sponsored study that found the same thing for loans on single-family homes.

Both studies support the conclusion that “location efficiency” of the property improves housing affordability for the occupant and results in more secure loan repayments. Location efficiency is a measure of how much money an average household would likely spend on personal transportation based on the characteristics of the house’s neighborhood. Homes in sprawl have poor location efficiency, requiring an average of 2.5 cars per family, driven 14,000 miles a year and costing well over $10,000 annually, while homes in walkable neighborhoods with good transit (such as the ones pictured here) require less than 1 car per family, on average, driven some 8,000 miles a year and costing less than $4,000 annually.  











Photo 1. Telegraph Hill in San Francisco, an area made less affordable by current lending rules. (Photos by the author, © 2013)



Photo 2. Russian Hill in San Francisco

Money saved on transportation (or utilities) means the homeowner has an additional amount available for mortgage payments.

Why should we care about this?

First of all, we should care because America, and indeed the whole world, is still suffering from the results of a financial panic triggered by mortgage defaults and collapsing housing prices. Unemployment is still too high, and salaries are not growing enough. Many families are still unable to qualify for a mortgage, or even refinance their current home, as a consequence of reckless lending. Others find that they cannot afford to rent the apartment or home that they want. Studies like the new Fannie Mae analysis of 37,000 mortgages on multifamily rental properties show how to make lending more responsible while also increasing consumer choices.

Second, we should care because housing in more sustainable neighborhoods costs more than sprawl housing. If mortgages on efficient homes in locations with access to transit and amenities are a better risk, it means banks can safely lend money to people with lower incomes or credit scores than they can now to buy houses in those location efficient neighborhoods, or rent apartments to such people. Therefore, more people can afford an energy efficient home in the type of neighborhood they prefer.

If this lending reform is made (that is, accounting for a loan applicant’s (or renter’s) expected transportation expenses), it will allow buyers to pay a premium for efficient housing in walkable, convenient communities, causing more of it to be built. More transit-oriented development will help bring supply into better balance with demand, lowering housing costs. Nationwide, this new construction will displace sprawl and thus reduce vehicle pollution by an amount comparable to the savings from higher fuel economy in cars. And more secure mortgages will bring with them lower interest rates to the buyer, greater returns to mortgage investors, and a more robust global financial system.

So why is this not happening and in use by mortgage lenders? One possible reason is that lenders still are not convinced that location efficiency will predict default rates. The study commissioned by Fannie Mae should solve that problem, at least for multifamily buildings but also for condominiums and single- family homes where the connection between low transportation costs and more cash availability to pay the mortgage is even more direct.

Or if it doesn’t, one should wonder why Fannie has not commissioned a study that DOES answer the questions they need resolved.

NRDC has been urging Fannie to use its vast resource of data on home loan performance to analyze location efficiency on single family houses for many years -- since the year began with a “1” -- and has offered to cooperate with them on study design, but has yet to see results.

It is hard to imagine any reasons for inaction. Lending reforms make more money for lenders, reduce the federal deficit, help the housing sector continue to recover, allow young people to afford to buy homes in the neighborhoods they prefer, put people back to work, reduce our trade deficit in oil—the list of benefits just goes on and on and on.

The solution is simple. When lenders and investors (including government-sponsored Fannie Mae and Freddie Mac) look at loan applicant income and compare it to monthly mortgage expenses, they should account for monthly savings from location efficiency and also energy efficiency. This is easy to do: it could be launched tomorrow if they wanted.

Everyone wins from mortgage reforms that consider the transportation and energy efficiency of the property’s location because:

  • More people can afford homes, they can afford the neighborhoods they want, and interest rates are slightly lower for location efficient homes;
  • Mortgage loans are more secure, strengthening the world’s resistance to a repeat of 2007’s economic crash;
  • Jobs are created by more smart growth construction and more energy efficiency; and
  • The nation takes a big step toward meeting our goals for climate pollution reduction because walkable communities mean fewer pollution-spewing vehicles on our roadways.

The president made a stirring argument a few weeks ago explaining the urgent need to do something to stop climate change, noting that reducing emissions won’t cut employment growth – in fact, if done wisely, the reductions will make us more productive. This reform is something the Administration could do right now that would affirmatively generate jobs and growth while cutting emissions dramatically.