The easier it is to get around an area without a car, the less likely a homeowner there will default, all other things being equal, an environmentalist group says.
A study released Wednesday by the Natural Resources Defense Council found a direct link between foreclosure rates and the transportation costs in a given area. Lenders, the group said, should change their underwriting practices to give "better borrowing terms" to buyers of homes in compact areas that are well served by public transit and other alternatives to the automobile.
Underwriters could allow higher debt-to-income ratios, lower credit scores or higher loan-to-value ratios for borrowers living in areas where there are many transportation options and lower commuting costs, without raising the probability of default, the study said.
"We wanted to make the connection about how transportation costs are important to determining what people can pay for housing," said Jennifer Henry, the real estate sector manager at the council's Center for Market Innovation.
The study pulled data on 40,000 mortgages in seven Chicago-area counties, four counties in the Jacksonville, Fla., area and in San Francisco proper as well as Census Bureau data on neighborhood conditions, income and car ownership. In all three cities, the study found that the probability of foreclosure increases as vehicle-ownership levels rise.
For example, in a case where two homeowners in different parts of the Chicago area had the same risk characteristics (a credit score of 680, a total debt-to-income ratio of 41% and a loan-to-value ratio of 80%), the study found that the household in the neighborhood where car ownership was one car per $33,000 of income had a greater chance of foreclosure than the household in the area where auto ownership was lower, at one car per $58,000 of income.
Jack Guttentag, a retired professor of finance at the University of Pennsylvania's Wharton School of Business, said the correlation between transportation costs and the ability to pay the mortgage is not entirely surprising.
But it's not necessarily a factor that is practical to incorporate into the underwriting process.
For one thing, doing so could be perceived as discriminatory.
"There was a time when lenders did indeed try to take into account area characteristics — and the practice was decried as redlining and made illegal," Guttentag said.
In addition, the task of incorporating transportation factors "would be enormous," he said. "Who's going to put those numbers together and keep them up-to-date?"