AIR Innovations Conference Location Efficient Mortgages August 12

AIR Innovations Conference Location Efficient Mortgages August 12, 2004 Jacky Grimshaw Center for Neighborhood Technology

LEM Partnership • Center for Neighborhood Technology-- Chicagobased, 26 years of experience in housing, transportation, and air quality • Natural Resources Defense Council -- Using law and science to protect the environment • Surface Transportation Policy Project -- Washington -based transportation policy reform organization

Why create a LEM? • Response to affordable urban home ownership • Consideration of transportation costs in relation to location and transportation options • Examination of the disincentives to urban ownership – Mortgage underwriting criteria – Sticker Shock from urban costs © 2001 Center for Neighborhood Technology 3

Median Household Spending

Local Characteristics That Shape “Location Efficiency” • Residential density at the community level • Access to public transit services • Access to shopping, services, cultural amenities, and schools • Pedestrian “friendliness” of sidewalks, bikeways, benches, lighting, plantings

What’s the difference for a median income borrower? 3 -person household with one car, a $42, 000 gross income, location efficient neighborhood, no other monthly debt, 5. 6% interest rate, and a 30 -year term Traditional Mortgage: LEM: • $153, 593 home ä$339 monthly LEV • $980 monthly PITI ä$210, 641 home • 5% down payment ä$1, 344 monthly PITI ä 3% down payment The LEM means $57, 048 more home buying power © 2001 Center for Neighborhood Technology 6

Other Examples of LEM Impacts Location Efficient Mortgage Traditional Income Mortgage $100 LEV $200 LEV $300 LEV $40, 000 $138, 965 $178, 964 $184, 177 $189, 389 $193, 609 $50, 000 $173, 706 $222, 402 $227, 614 $232, 827 $238, 040 $60, 000 $208, 447 $265, 840 $271, 052 $276, 265 $281, 477 $70, 000 $243, 188 $309, 278 $314, 490 $319, 703 $324, 915 Assumptions: 5. 6% interest rate, 30 -YR fixed rate mortgage; no other monthly debt; 2% of payment for taxes and insurance. © 2001 Center for Neighborhood Technology 7

How much more of Cook county is affordable to the working poor when we count transportation costs? © 2001 Center for Neighborhood Technology 8

Who is Likely to Apply for a LEM? • Moderate to middle income families • Interested in living in an urban community • Prior experience with public transportation • Regular or predictable travel patterns

Key Features of the LEM • Family transportation savings “stretch” income/expense ratios • Fully insured, 15 - to 30 -year, fixed rate mortgage product • Single-unit, owner-occupied principal residences, including condos and town homes • Loan-to-value ratio (LTV) of 97% • Long-term total debt/income ratio of 45% with location advantage included

LEM Uses Standard Borrower Qualifying Features • Credit and income history • Employment history and stability • Front-end and back-end ratio calculations • Professional property appraisal

Underwriting Criteria • Minimum borrower contribution is 3% from own funds • Minimum PITI reserves are two months • Qualifying ratios with Location Efficient Value (LEV) added to income: – 35% maximum housing ratio – 45% maximum debt-to-income ratio

Underwriting Criteria (con’t) • Qualifying ratios without Location Efficient Value (LEV) added to income: – 39% maximum housing ratio – 49% maximum debt-to-income ratio (may go higher with compensating factors but cannot exceed 50%)

Home Buyer Education • Pre-purchase home buyer education is required • Curriculum includes additional module on pitfalls of new credit after closing

Other LEM Features • Transportation data monitored by a voluntary annual survey for 3 years – Key household information reported annually to LEM program for research purposes only – Where available, a transit pass would record basic use data

Location Efficient Mortgage. SM Benefits ä Enables more moderate and middle income families buy homes in urban communities ä Increases use of public transportation ä Supports local economies and amenities

The LEM Supports Existing, Local, and State Policies

Jacky Grimshaw jacky@cnt. org www. cnt. org