Location-Efficient Mortgage

Location-efficient mortgages (LEMs) are a financial instrument that allows homebuyers to shift a portion of the savings gained through reduced transportation spending over to their housing expenses. They are intended to reward homebuyers for choosing to live in walk-able, transit-oriented communities, rather than electing to live in automobile-dependent outlying suburbs. As such, they are seen as a means to simultaneously address issues of sprawl, automobile overuse, unaffordable housing, and resource overconsumption. Rather than simply focusing on the price of the housing unit itself, LEMs approach housing affordability in a more holistic fashion, taking into account the overall affordability associated with living in particular regions of a city over others, based on likely transportation needs and associated expenses.

In the spring of 1996, three nonprofit organizations—the Center for Neighborhood Technology in Chicago, the Natural Resources Defense Council in San Francisco, and the Surface Transportation Policy Project in Washington, D.C.—formed a research team to investigate the possibility of establishing an innovative new mortgage product called the LEM. The LEM Partnership (now known as the Institute for Location Efficiency) was formed to conduct the related research, formulate the mortgage product itself, and seek ways to make it available in the primary and secondary mortgage marketplaces. The project is also partially funded by the U.S. Department of Energy, the U.S. Environmental Protection Agency, the Federal Transit Administration, and several private foundations. As a part of a Federal National Mortgage Association (Fannie Mae)–sponsored Alternative Underwriting Experiment, the LEM Partnership conducted negotiations with Fannie Mae to conduct market tests of the LEM. The first such test market was Seattle. At this time, there are only four housing markets in the United States in which the LEM is offered: Seattle, Chicago, Los Angeles, and the San Francisco Bay Area.

The rationale behind the LEM is that households in more-automobile-dependent communities have been found to spend on average more than 20 percent of their budgets on transportation compared with less than 17 percent in households located in communities with more transportation options available. The monetary costs of transport have a significant effect on standards of living, as the cost of private automobile transport is a substantial fraction of most family budgets. In fact, studies show that most American families spend more on driving than on healthcare, education, or food.

A 1994 paper by John Holtzclaw evaluated the relationship between four neighborhood characteristics on housing affordability—residential density, transit accessibility, neighborhood shopping, and pedestrian accessibility—as well as their effects on motor vehicle usage per household and total vehicle miles traveled annually per household. The study established that residential density and transit accessibility were the best statistical correlations with household transportation costs. In addition, higher residential density was found to be the most important factor in increasing location efficiency, as better transit accessibility, more local shopping, and a more pedestrian-friendly environment generally accompanied it. The study concluded that residential density and transit accessibility variables could be used to quantify household transportation costs with a high degree of reliability.

[Page 304]Similar products available include the energy-efficient mortgage, in which the costs of upgrading a home's energy efficiency are rolled into the cost of the mortgage, and the smart commute mortgage, which is similar to the LEM but with less emphasis on neighborhood characteristics.

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