Location-Efficient Mortgages: Is the Rationale Sound?

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.