Using a sample of over 40,000 mortgages in Chicago, Jacksonville, and San Francisco, we model the probability of mortgage default based on differences in location efficiency. We used two proxy variables for location efficiency: 1) vehicles per household scaled by income and 2) Walk Score. We find that default probability increases with the number of vehicles owned after controlling for income. Further, we find that default probability decreases with higher Walk Scores in high income areas but increases with higher Walk Scores in low income areas. These results suggest that some degree of greater mortgage underwriting flexibility could be provided to assist households with the purchase of location efficient homes, without increasing mortgage default. They also support the notion that government policies around land use, zoning, infrastructure, and transportation could have significant impacts on
mortgage default rates.
Excerpts from the Conclusion:
Our findings indicate that location efficiency matters. Taken together, our results have significant policy implications with respect to lending practices, land use, and transportation planning.
We test our hypotheses regarding vehicle ownership and mortgage default and find that the probability of default does increase with vehicle ownership. Moreover, the impact of location efficiency (as measured by income-normalized vehicle ownership) on default is nontrivial. ... The results strongly suggest that researchers developing and refining automated mortgage underwriting models should seek to test the impact of location efficiency
variables within their models.
It is interesting to note that there is an additional possible explanation for why mortgages for location-efficient homes perform better, beyond the household budgetary savings of lower vehicle ownership. This explanation is that location efficient homes might hold their value better than other homes, and therefore better enable borrowers to avoid foreclosure through alternative measures (such as selling or refinancing the home) if they fall behind on payments or need to manage payment shock from an adjustable rate mortgage.
... our results provide support for policies supporting smart growth development and urban revitalization. That is, designing neighborhoods in such a way that reduces transportation needs is beneficial to borrowers as well as the environment.
Location Efficiency and Mortgage Default (PDF File)
Authors: Stephanie Y. Rauterkus, Grant I. Thrall, and Eric Hangen
Journal of Sustainable Real Estate Vol. 2, No. 1, 2010
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