Some federal policies encourage sprawling development (for instance, the federal income tax home-mortgage interest deduction encourages sprawl because it provides the largest benefit to those who buy the most expensive houses, which often are on larger lots). The federal-government-backed Location Efficient Mortgage initiative is a step in the other direction. The goal of Location Efficient Mortgages is to encourage development and home purchases in dense urban areas with amenities and public transportation close by.
Thecost of car ownership ranks as the second highest expense–after mortgage payments–in many households. Families can save as much as$400 a month if they do not own a car and rely on public transportation, according to the Natural Resources Defense Council.
The Location-Efficient Mortgage program is the brainchild of the National Resources Defense Council in collaboration with two other non-profit organizations: the Center for Neighborhood Technology in Chicago and the Surface Transportation Policy Project. Three years of research convinced them that city living does produce significant transportation savings. They set out to persuade federal agencies as well as Fannie Mae that these savings should allow people to borrow more money for a more expensive house in the city than they would have been able to afford in the suburbs.
Fannie Mae, the nation’s largest source of financing for home mortgages, has set aside $100 million for a pilot program to underwrite these loans. The upper limit of loans underwritten by Fannie Mae is $252,000.
Theprogram has been operating since March 2000 in Los Angeles, Chicago and Seattle. Applicants for a loan give a loan officer the address of the house they want to buy, and a computer generates the dollar value of the transportation savings for that family in that particular location. Home buyers are not required to renounce car ownership in order to qualify for the loan. Rather, it is assumed that applicants at their income level buying a house in a particular neighborhood will save so much in transportation costs. The loan officer will then look at that particular family’s expenses and debts to determine the exact terms of the loan. Thus location efficency is simply one factor used in calculating the terms of the loan. However, location efficiency often allows applicants to take out a larger mortgage: up to $50,000 more than they would receive otherwise.
Location-Efficient Mortgages in some cities come with an additional perk: a free or reduced-cost bus pass for several years after the house is purchased.
Sincethe pilot program was launched only recently, it is hard to determine how well LEM will work and whether it will actually achieve its goals.