Can rates of car ownership predict mortgage performance?

According to some new research from two environmental groups, the answer is yes.

The National Resources Defense Council, an environmental advocacy organization, and the Center for Neighborhood Technology, a Chicago group that promotes urban sustainability, have completed a study of 40,000 mortgages in three cities over a 30-year period. After controlling for income, the groups found that the probability of mortgage foreclosure increased as neighborhood car ownership levels rose.

In other words, location efficient communities where public transit options are available can contribute to the financial stability of its residents. The reasoning: If the homeowners don t need to own a car, they can save money on transportation costs (including lease and purchase costs, maintenance, insurance, gas and parking). They are then better positioned to weather negative financial circumstances say, a spike in the price of gas or a job loss. (Transportation costs account for roughly 17% of the average American household s expenditures, the second-largest budget item behind housing, according to 2008 figures from the Bureau of Labor Statistics.)

The report recommends that lenders include measures of location efficiency and borrowers transportation costs in their underwriting decisions providing proportionally better borrowing terms for purchasers of location-efficient homes, the report says. But Jennifer Henry, the real estate sector manager in the Center for Market Innovation at the NRDC, says that location efficiency isn t a determining factor in mortgage default or foreclosure it s an additional characteristic that, when taken into account, makes your ability to predict foreclosure more accurate.

Indeed, the link between transportation expenses and ability to pay the mortgage is somewhat tenuous, says John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group. Transportation costs represent a tangential relationship to mortgage default, he says. For homeowners who are behind on their mortgage because of a job loss or an increased monthly payment getting rid of a car might help only so much. Job loss and unsuitable mortgages with unsustainable terms and conditions are more directly tied to foreclosure, adds Taylor.

Talk of how walkability boosts home values isn t new. A study by CEOs for Cities, a network of urban leaders and corporate executives, published last year found a positive correlation between an area s walkability proximity to shopping, services, schools and parks and housing prices in 13 of the 15 housing markets studied.

Prices of property around transit-oriented developments especially new developments have increased or at least kept their value, says Sarah Catz, a research specialist at the University of California, Irvine s Institute of Transportation Studies. Catz says she is currently doing research that shows that property increases in value when you bring transit into a region or area.

A mortgage product based in part on a borrower s access to public transit has existed. The Center for Neighborhood Technology (in partnership with Fannie Mae) developed a location-efficient mortgage program in the 1990s. Just a few cities experimented with these products, including Seattle and Chicago, but only about 300 of the mortgages were made, says Henry, but none went into default.

Under the program, which no longer exists, a statistical model calculated the monthly savings a typical household would realize based on the property s proximity to local services and public transportation and how walkable the area was. That amount would be added to their income, which would reduce the borrower s debt-to-income ratio, thus potentially qualifying them for a bigger mortgage on the theory that with lower transportation costs, they could afford it, says Diane Wasson, a vice president at Home Street Bank in Seattle, who was involved in the program. (Debt-to-income ratio is one of several criteria, including loan-to-value ratio and credit history, lenders use to consider an application.)

Getting lenders to incorporate this into their practices might be a stretch. But last year the House passed a bill that would promote energy- and location-efficient mortgages for home buyers through incentives from Fannie Mae and Freddie Mac. And a spokeswoman from the Department of Housing and Urban Development (HUD) says supporting location efficiency in community development practices is absolutely a priority for the agency. If we can reduce energy and transportation costs through more location efficient housing, it will make homes more affordable generally, and thus reduce the risk of foreclosures, she says.