Report: Foreclosure Risk Tied to Car Costs

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The National Resources Defense Council has come up with a novel formula for figuring out your neighborhood’s home value — and whether or not you’re at risk of foreclosure. It starts with counting the number of cars in your neighborhood’s garages and driveways, and ends with a number that could have a huge impact on your financial life.

It’s all about “location efficiency” — a moniker the NRDC applies to the key driver in predicting mortgage defaults. The Council claims that there is a direct link between the transportation costs in a specific neighborhood’s foreclosure rate. Predicting a neighborhood’s foreclosure risk would be a huge help to lenders, given that one of every 138 U.S. homes were in foreclosure during the first quarter of 2009, according to Realty Trac. That’s a 16% rise over the same period in 2009.

In the January report, NRDC researchers says that rates of vehicle ownership, particularly when weighed against key factors like availability to public transportation or “walkability” rates should be factored in by mortgage lenders when weighing an applicant’s risk of defaulting on a mortgage. Location efficiency should also be weighed by real estate developers and even by policy makers in Washington, D.C.

"Add urban sprawl to the list of sources for our current financial mess," said David Goldstein, co-director of the Energy Program at NRDC. "It’s not just predatory lending or lax standards. The connection between transportation costs and mortgage default cannot be ignored. The sooner we address it in our lending and development practices, the sooner we will start to see a more stable real estate sector."

Now, let’s get down to the numbers. Overall, transportation costs account for 17% of the average American’s household income, says the NRDC. By plugging in that number, along with some other risk factors like employment status and debt burden, into 40,000 mortgages in three key U.S. urban areas (Chicago, San Francisco and Jacksonville, Fla.), researchers claim that in neighborhoods where there was less reliance on cars for transportation, foreclosure rates were lower.

“In all three cities, the results were the same — if your only choice is to drive, you have much less economic flexibility — flexibility that can protect you from foreclosure in tough times,” says Jennifer Henry, real estate sector manager in the Center for Market Innovation at NRDC. “Knowing that now, aggressive investment in public transportation and walkable communities make even more sense. And investing in transit will not just improve our economy by avoiding future foreclosures — but create jobs to get things humming right now.”

In addition, comparing two homebuyers with the same credit score and debt-to-income ratio reveals that the one who resides in a better location efficiency neighborhood is less likely to default on his or her mortgage.

The NRDC’s energy program director, David Goldstein, provides a more concrete example in an accompanying blog on the Council’s Web site:

“For example, in a relatively location inefficient, neighborhood (with, say, a median auto ownership rate of one car per $33,000 of income), if a homebuyer has a credit score of 680, a total debt-to-income (“back end”) ratio of 41%, and a home loan-to-value ratio of 80%, the model predicts a 9.9% chance that the home will fall into foreclosure. For a second buyer with all of the same mortgage underwriting characteristics as the first buyer — but who is buying in a more location efficient area with, say, a median auto ownership rate of one car per $58,000 of household income — the chance that the home will fall into foreclosure drops to 7.2%.”

The NRD seems to have a bias toward more cars on our nation’s road and highways (its tagline is “The Earth’s Best Defense”), but the location efficiency study does provide some decent evidence that the higher the consumer use of cars, trucks and other vehicles, the greater the risk of home foreclosure.

Weigh the evidence for yourself at the NRDC Web site.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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