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Location Efficient Mortgages: Is the Rationale Sound?

  • Krupnick, Alan


    (Resources for the Future)

  • Blackman, Allen


    (Resources for the Future)

Location efficient mortgages (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 larger mortgages with smaller downpayments 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 over 8,000 FHA-insured mortgages matched with data on various measures of location efficiency to test this proposition. Our results suggest that it does not hold and that LEMs—like other low-downpayment mortgage programs—will raise mortgage default rates. This cost must be weighed against any potential anti-sprawl benefits LEMs may have.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-99-49-rev.

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Date of creation: 01 Aug 1999
Date of revision:
Handle: RePEc:rff:dpaper:dp-99-49-rev
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  1. 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.
  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 245-60, November.
  4. 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.
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