Mortgage lenders turn a blind eye to the transportation costs of homebuyers, and that’s bad for borrowers, banks, and urbanism.
When a bank is deciding whether or not to lend you money to buy a home, they don’t really care whether you can afford to repay the loan, because they’re not holding on to your mortgage. It’s more likely that your small neighborhood bank plans to sell your loan to a larger financial corporation that will either sell it again or make mortgage sausage with it. So what the loan officer is really worried about is whether your loan appeals to these big companies, that is, whether it meets Fannie Mae and Freddie Mac guidelines. These guidelines usually come close to approximating a borrower’s ability to repay, but they have a glaring flaw that’s also bad for cities: they don’t account for transportation costs.
The lender knows where the borrower lives. The lender knows where the borrower works. But the lender refuses to infer anything about the financial cost of the borrower’s regular commute between these two places. This doesn’t make any sense. Transportation costs are easily predictable and have a direct bearing on a borrower’s ability to repay the loan.
Housing developers have used this loophole to sell remote and inexpensive homes. In The End of the Suburbs, Leigh Gallagher relays the sales pitch of a developer in Wright County, Minnesota: “Drive 10 miles and save $10,000.” Simple math shows that it’s not worth it. AAA estimates that an average sedan costs 60.8 cents per mile to drive (to account for fuel, tires, depreciation, etc.), so commuting those ten additional miles will cost $91,200 over the course of a 30-year mortgage. Lending money to a borrower so they can pursue a financially-irresponsible lifestyle is bad for business: the foreclosure crisis has hit far-flung suburbs especially hard.
But the Wright County salesman’s pitch worked, and homebuyers have moved farther and farther from the core cities, ostensibly for affordability. I see two problems with this. First, for the homeowners, a long commute means that they can spend more than a quarter of their household income on transportation, easily offsetting their savings on the house itself. The Center for Neighborhood Technology’s Housing + Transportation map is a dramatic illustration of this, and they have a slick two-page PDF about affordability in the Twin Cities. Second, for the metro region as a whole, the phenomenon leads to sprawl and the concomitant hollowing-out of urban centers — with the all-too-familiar ills that follow.