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AIR Innovations Conference Location Efficient Mortgages August 12, 2004 Jacky Grimshaw Center for Neighborhood Technology
© 2001 Center for Neighborhood Technology LEM Partnership Center for Neighborhood Technology-- Chicago- based, 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
© 2001 Center for Neighborhood Technology 3 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 Median Household Spending
© 2001 Center for Neighborhood Technology 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
© 2001 Center for Neighborhood Technology 6 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: $153,593 home $980 monthly PITI 5% down payment LEM: ä$339 monthly LEV ä$210,641 home ä$1,344 monthly PITI ä3% down payment The LEM means $57,048 more home buying power
© 2001 Center for Neighborhood Technology 7 Other Examples of LEM Impacts Assumptions:5.6% interest rate, 30-YR fixed rate mortgage; no other monthly debt; 2% of payment for taxes and insurance. Traditional Location Efficient Mortgage Income Mortgage $100 LEV$200 LEV$300 LEV $400 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
© 2001 Center for Neighborhood Technology 8 How much more of Cook county is affordable to the working poor when we count transportation costs?
© 2001 Center for Neighborhood Technology 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
© 2001 Center for Neighborhood Technology 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
© 2001 Center for Neighborhood Technology LEM Uses Standard Borrower Qualifying Features Credit and income history Employment history and stability Front-end and back-end ratio calculations Professional property appraisal
© 2001 Center for Neighborhood Technology 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
© 2001 Center for Neighborhood Technology 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%)
© 2001 Center for Neighborhood Technology Home Buyer Education Pre-purchase home buyer education is required Curriculum includes additional module on pitfalls of new credit after closing
© 2001 Center for Neighborhood Technology 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
© 2001 Center for Neighborhood Technology Location Efficient Mortgage SM Benefits äEnables more moderate and middle income families buy homes in urban communities äIncreases use of public transportation äSupports local economies and amenities äImproves regional/local air quality and congestion mitigation äReduces energy consumption
© 2001 Center for Neighborhood Technology The LEM Supports Existing, Local, and State Policies
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