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Location-Efficient Mortgages: Is the Rationale Sound?

Author

Listed:
  • Allen Blackman

    (Quality of the Environment Division, Resources for the Future)

  • Alan Krupnick

    (Quality of the Environment Division, Resources for the Future)

Abstract

Location efficient mortgage (LEM) programs are an increasingly popular approach to combating urban sprawl. LEMs allow families who want to live in densely populated, transit-rich communities to obtain a larger mortgage with a smaller down payment than traditional underwriting guidelines allow. LEMs are premised on the proposition that homeowners in such “location-efficient” areas can safely be allowed to breach underwriting guidelines designed to prevent mortgage default because they have lower than average automobile-related transportation expenses and more income available for mortgage payments. This paper employs records of more than 8000 FHA-insured mortgages matched with data on various measures of location efficiency to test this proposition. The results suggest that it does not hold and that LEMs-like other low-down-payment mortgage programs-will raise mortgage default rates. This cost must be weighed against any potential anti-sprawl benefits LEMs may have. © 2001 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • Allen Blackman & Alan Krupnick, 2001. "Location-Efficient Mortgages: Is the Rationale Sound?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 20(4), pages 633-649.
  • Handle: RePEc:wly:jpamgt:v:20:y:2001:i:4:p:633-649 DOI: 10.1002/pam.1021
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    References listed on IDEAS

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    1. Edwin S. Mills & Luan Sende Lubuele, 1994. "Performance of residential mortgages in low- and moderate-income neighborhoods," Proceedings, Federal Reserve Bank of Philadelphia, pages 245-262.
    2. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316.
    3. Mills, Edwin S & Lubuele, Luan' Sende, 1994. "Performance of Residential Mortgages in Low- and Moderate-Income Neighborhoods," The Journal of Real Estate Finance and Economics, Springer, vol. 9(3), pages 245-260, November.
    4. Deng, Yongheng & Quigley, John M. & Van Order, Robert & Mac, Freddie, 1996. "Mortgage default and low downpayment loans: The costs of public subsidy," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 263-285, June.
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