location efficient mortgages
The following material is excerpted with written permission from How Smart Growth
Can Stop Sprawl, a briefing guide for funders by David Bollier. The views expressed are those of the author. (Washington, D.C.: Essential Books), 1998. 

Location-efficient Mortgages: New Capital to Resettle Cities

People who decide to live in the city generally find that, when applying for mortgages, banks do not consider it can be much cheaper to live near public transit and other amenities. These savings can be significant -- as much as $397 a month, according to the Natural Resources Defense Council. Unfortunately, banks do not take such factors into account when reviewing a mortgage application; they use relatively fixed ratios of annual income to help determine a person's creditworthiness. 

The Center for Neighborhood Technology in Chicago, working with the Natural Resources Defense Council and Surface Transportation Policy Project, have another idea: Why not allow mortgagees to borrow more money to buy larger houses in the city, based on the actual cost savings of living near mass transit? 

Under a location-efficient mortgage, borrowers could have access to an additional $54,000 to purchase a home. Stephen Perkins of the Center explains the rationale for the program: "You should be able to give a loan officer the address of the home you want to buy, and have him or her pull up on a screen the dollar value of the transportation savings that that location represents for your family. You would be permitted to take out a larger mortgage as a result. This change would shift resources toward compact development." 1

Perkins notes that Chicago's public transportation system represents a competitive advantage for businesses and workers: "The marketplace needs to recognize and give value to these location efficiencies, so that capital and resource flows are targeted to already developed communities and to transit hubs within them, rather than to the urban fringe. The proper valuing of location efficiency can offset historical redlining of urban communities and urban disinvestment." 2

The key challenge is developing the cost basis for location-efficient mortgages and getting them accepted by banks, banking authorities and the secondary loan markets. These challenges may soon be met. Fannie Mae, the Federal National Mortgage Association, has recently sanctioned a three- to five-year test of location-efficient mortgages in Chicago through four banks. The new system uses a computerized model to calculate location-specific cost savings that individuals can reap by living near mass transit and not owning a car. Computer models have also been developed for San Francisco and Los Angeles, which may be the next cities to launch experiments with location-efficient mortgages. 

1 Jeff Gersch, E-amicus, Fall 1996.
2 Stephen Perkins, PhD. and Scott Bernstein, "Toward an Alternative Economics for the Metropolitan Chicago Region," May 7, 1997, available at http://www.cnt.org/mi/altec2.htm.

The Center for Neighborhood Technology has created three web pages that provide information on location efficient mortgages. 

This web page http://locationefficiency.com is used primarily by banks and prospective applicants in Chicago.  It has an easy to use calculator to identify potential extra credit which can be amortized using the new underwriting, and links to the listings of the Chicago Board of Realtors so that interested parties can use it to find actual homes for sale. 

http://www.cnt.org/lem provides an introductory article written by American Planning Association on  Location Efficient Mortgages. 

Fannie Mae Partnership Offices Home Page

For general information on Fannie Mae http://www.fanniemae.com