By Alyssa Katz

Could “drive until you qualify,” a mantra of the real estate boom, give way to “qualify so you don’t have to drive”?

That’s the idea behind location-efficient mortgages, which encourage homebuyers to settle in communities where public transportation, work, shopping, and other destinations are situated nearby. As the White House and Congress seek to reduce energy consumption and fight global warming, they’re turning to location-efficient mortgages as a way to coax consumers and the housing industry to make sustainable choices.

With a typical mortgage, a lender evaluates a borrower’s ability to repay by comparing the household’s prospective housing costs to its income. But that calculation leaves out a huge part of the true expense of housing: transportation, which accounts for an average of 18% of a household’s budget. A house in a car-dependent neighborhood requires one vehicle for every adult. An equivalent residence in an area with diverse transportation options can get by with one car, or even none--saving thousands of dollars every year. Yet while the buyer of the latter home is committing to a less expensive total housing budget, the household’s increased capacity to pay isn’t recognized by mortgage lenders. As a result, consumers have greater buying power in sprawling suburbs than they do in more sustainable urban settings--steering many homebuyers to choose car-dependent places to live.

A location-efficient mortgage recognizes transportation costs as part of families’ housing budgets. In locations rated efficient, where transportation expenses are likely to be relatively low, homeowners can take out bigger mortgages than they would otherwise qualify for--and therefore buy homes that would have been out of reach.

“The purpose of all this is removing artificial constraints to consumer choice,” says David Goldstein, Energy Program co-director for the National Resources Defense Council and a longtime advocate for location-efficient mortgages. “More people will choose to live in smarter growth locations.”

An Incomplete Experiment

In 1994, NRDC teamed up with the Center for Neighborhood Technology and Surface Transportation Policy Project to found the nation’s first location-efficient mortgage program, in partnership with Fannie Mae. The groups trademarked "location-efficient mortgage," to make sure that any product under that label met rigorous standards, and, following five years of research and development, Fannie Mae committed to purchase $100 million in the mortgages from lenders. Countrywide, National City Mortgage, and a handful of others offered location-efficient mortgages for sale in Chicago, Seattle, Los Angeles, and San Francisco.

In each market, the Center for Neighborhood Technology mapped out location-efficiency values neighborhood by neighborhood, using data on residential density, public transportation access, and other factors that influence the amount of driving a resident is likely to do. That value translated into a predicted transportation cost savings that lenders then added to the total amount a household could budget for monthly housing payments.

But although the model was elegant, the experiment had limited impact. It generated 41 mortgages in Chicago and even fewer in other cities. The product fell victim to poor marketing and worse timing, as the mortgage industry released countless competing products that were cheaper, easier to apply for, and generous to borrowers.

A 2005 study of the project by transportation planner Kevin Krizek concluded that location-efficient mortgages did not strongly influence homebuyers’ decision making about where to live. Almost all buyers started out as one-car households and remained so; they already planned to live in a densely developed neighborhood near mass transit. Many sought location-efficient mortgages not for financial reasons but because the program offers a chance to participate in an innovative environmental project. “These were very small spits in an ocean,” says Krizek, who teaches at the University of Colorado. “The impact was more virtuous than financial.”

Two other experiments, both launched in 2002, tested different variations on location-efficient mortgages. In 2002, Fannie Mae introduced SmartCommute, which gave borrowers extra credit to household budgets for living near public transportation, allowing them a slight edge in qualifying for loans. The Massachusetts state housing finance agency, meanwhile, launched “Take the T,” which insured zero-down-payment, below-market-rate mortgages for buyers who proved they were mass transit commuters. A total of 72 buyers took advantage of that program.

Zero Foreclosures

The limited data available shows location-efficient mortgages performing well: In 2004, the Center for Neighborhood Technology found just one default, under Boston’s program, and zero foreclosures. While it's unclear how those are faring now in the real estate downturn, it's also increasingly clear that homes in the most inefficient locations-- outlying, exurban areas--are suffering higher price declines and foreclosure risks than those in locations that are less auto dependent. That’s partly because buyers seeking affordability flocked to suburban fringes at the peak of the bubble, paying inflated prices and using the riskiest mortgage products. But the burden of transportation costs--ownership of multiple cars and high gas expenditures--adds to households’ financial difficulties.

An upcoming NRDC study on mortgage foreclosures finds that a borrower in an inefficient location is more likely to go into foreclosure on a mortgage than one with the same credit and profile who lives in an efficient location.

Washington Gets on Board

In its new sustainability initiative, HUD is looking for ways to calculate the true costs of housing, including associated energy and transportation costs--and location-efficient mortgages is a model HUD will be studying as it moves to influence the marketplace. Meanwhile, two bills in Congress, the cap-and-trade legislation and the GREEN Act for energy efficient housing, both call on Fannie Mae and Freddie Mac to set underwriting standards and purchase location-efficient mortgages for low- and moderate-income homebuyers.

The brief experiments in retailing location-efficient mortgages offer a couple of important lessons for any future efforts, say those who have stewarded and studied them:

• Location efficiency should be a feature, not a stand-alone product–it needs to be integrated into lenders' automated underwriting systems and available in combination with a full range of mortgage product options. “The optimal scenario would be for location efficiency to be a factor in every loan made,” says David Chandler, principal business analyst for the Center for Neighborhood Technology. Thanks to a grant from the Rockefeller Foundation, the organization has calculated location efficiency values for every large metropolitan area in the nation, available on as the interactive Housing + Transportation Affordability Index.
  
• The products should be offered by a critical mass of lenders and provide financial advantages not otherwise available to consumers. If there’s a silver lining to the credit crunch, it’s that lenders have returned to strict scrutiny of borrowers’ finances. Location-efficient mortgages can add as much as $50,000 to a household’s home-buying power; for many, that could make all the difference in qualifying to purchase a home in a high-density area instead of heading for a car-dependent suburb.

Piling on more mortgage debt may be a hard sell to consumers and lenders alike. But Krizek notes that there’s a big difference between reckless lending without regard to ability to pay and the kind of meticulous calculation that goes into location-efficient mortgages. “Allowing borrowers to go into more debt is not necessarily a good thing,” he acknowledges. “But here there’s a social benefit--it enables families to take advantage of the savings they should have been able to take advantage of anyhow. It’s debt they should be able to handle.”

Other Resources

• The Location-Efficient Mortgage