Lose the Car, Keep Your House?

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Attention lenders: pedestrians are better risks!

A new study of mortgage defaults in three cities concludes that people who live in areas where they don't need a car are less likely to default on their mortgages than people who live in suburban sprawl. In fact, the likelihood of default went up with the number of cars a household owned.

The study, released today by the Natural Resources Defense Council, suggests that mortgage lenders might consider where someone lives when pricing a loan. The logic: if your car isn't sucking up cash, you have more to pay your mortgage debt.

Specifically, the study found that "default probability increases with the number of vehicles owned." What's more, the findings held true for buyers at different income levels.

The study analyzed 40,000 mortgage records in Chicago, Jacksonville and San Francisco covering loans of different amounts and terms, as well as a census records on car ownership and other data.

The results bolster the case for "location-efficient mortgages" -- a small but growing pool of loans that consider a property's closeness to public transit.

They also suggest that the common practice of "driving until you qualify" -- trekking further and further from the urban core to find a house cheap enough to finance -- is a dead end, says Congressman Earl Blumenauer of Oregon, who endorsed the NRDC study. You'd be smarter to push your lender (and your government) to recognize that your money could be better spent on housing than on gas, car insurance and maintenance.

The findings make sense. Not having to pay off a car loan or buy insurance or gas frees up cash for mortgage debt. The researchers also argue that "location-efficient homes" might hold their value better than other homes, and therefore better enable borrowers to avoid foreclosure through selling or refinancing. (And maybe a bank officer will just be in a friendlier mood if she can take the subway to your house and get a latte before your conference.)

Even a shaky borrower, the study says, can look more creditworthy in a high-density setting. An average borrower in an average Chicago neighborhood, it said, will default in 9.9 percent of cases. But get this: a borrower with the same risk profile in a more compact neighborhood is almost a third less likely to default. And a borrower with a debt/income ratio of 62.5 percent, in a more compact neighborhood, would be no riskier than the more solvent borrower in the typical neighborhood.

NRDC , an advocacy organization, hopes to influence mortgage lenders with the data. It also hopes to influence regulators, said NRDC planner Jennifer Henry in an interview with HousingWatch. "We would say to the government: the kinds of cities we're building, which are influenced a lot by your zoning codes and level of transportation investment, affect how people are able to pay their mortgages."
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