Are ‘Green’ Mortgages Less Risky?

CU360
April 9, 2010 | COMMENTS

While the nation continues to grapple with a troubling housing market and a rash of mortgage defaults, new research draws a direct link between “location efficiency”—a measure of the transportation costs in a given area—and mortgage foreclosure rates.

Factors such as neighborhood compactness, access to public transit, and rates of vehicle ownership can help predict mortgage performance, according to the Natural Resources Defense Council (NRDC).

Alternative travel options allow people living in location-efficient neighborhoods to drive fewer miles and own fewer cars, saving them substantial amounts of money on automobile-related costs and effectively increasing household income in these areas.

Related to mortgage underwriting, the principle is that the real cost of housing is a combination of mortgage and transportation costs. Residents of location-efficient homes have more flexibility when it comes to managing their transportation costs, making them less likely to default on a mortgage when compared to similar homeowners who spend a substantial portion of their household budgets on automobile transportation.

Homeowners in location-efficient areas, for example, could be better protected against rising gas prices. Even before the 2008 spike in gas prices, transportation costs were the second-largest expenditure for the typical American household, averaging $8,750 per year—more than 17% of the average household's pretax income.

Analyzing the impact of gas prices on transportation costs shows that the expenses associated with living in car-dependent areas of metropolitan regions can be both volatile and much higher than you might think. Unfortunately, standard lending practices account for only 9% of automobile-related transportation costs for a typical household.

Another aspect of location efficiency that could affect mortgage performance relates to home values. A study looking at 90,000 recent home sales in 15 different markets found a positive correlation between neighborhood “walkability” and home price (see Walkability Can Boost Property Values, cu360.cuna.org, 9/24/09). If location-efficient homes are more appealing to consumers, they'll be less likely to depreciate as much as other homes.

Based on its research results, NRDC urges lenders to:

1. Change mortgage underwriting practices to provide access to proportionally better borrowing terms for purchasers of location-efficient homes.

2. Conduct further analysis to develop and refine tools for assessing the impact of location efficiency, particularly for lenders relying on automated underwriting models.

Lenders that under estimate mortgage risk for borrowers purchasing homes in automobile-dependent areas expose themselves to increased credit losses. Conversely, lenders that over estimate mortgage risk for borrowers in location-efficient areas lose significant business opportunities. More finely tuned lending practices will produce better-quality loans, according to NRDC, benefiting both borrowers and lenders.