Celebrating 35 Years: Location Efficient Mortgages (LEMs)
35 Facts for CNT’s 35 Years: Each week we’ll expand on one fun fact. Enjoy!
#15 Location Efficient Mortgages (LEMs)
Location efficiency. This term, coined by CNT’s president, Scott Bernstein, is at the core of our work to build more sustainable communities. Run a web search for the term and you’ll find CNT’s fingerprints on nearly every result. You’ll certainly find a generally accepted definition of location efficiency, which can be boiled down to this:
“Compact neighborhoods with an interconnected street network, access to transit, mixed land uses, and concentration of retail and services are highly efficient communities. When brought together, these elements enable an efficiency of scale.”
The concept of location efficiency drives our thinking around the Housing and Transportation (H+T®) Affordability Index, our innovative and widely adopted tool to measure the true affordability of housing based on its location.
It also inspired the development of the Location Efficient Mortgage® (LEM), a revolutionary financing tool that recognized and accounted for the savings available to people who live in location-efficient communities.
The LEM was a joint endeavor that began in 1995, starting with a three-year research program led by CNT, the Natural Resources Defense Council, and the Surface Transportation Policy Project. Together, we formed a new nonprofit organization called the Institute for Location Efficiency (ILE).
On the basis of ILE’s research, in 2003, Fannie Mae, the nation’s largest source of home mortgage funds, sponsored a market test of the LEM. In consultation with ILE, Fannie Mae defined the guidelines of the LEM mortgage product, agreed to invest at least $100 million in LEMs, and authorized lenders to issue LEMs in four metropolitan market areas: Chicago, Seattle, Los Angeles, and San Francisco.
LEMs offered a way for potential buyers of households in urban neighborhoods to increase borrowing capacity based on the premise that they would spend less on transportation, and therefore have more disposable income, than the national average. Standard loan underwriting is based on a buyer’s ability to afford to spend 28 percent of gross monthly income on a mortgage payment, whereas the LEM increased this to up to 39 percent by factoring in transportation-related cost savings. For example, a household earning $50,000 a year could qualify for a $163,000 mortgage under standard lending practices. But, if a household in a compact, transit-accessible and pedestrian-friendly neighborhood could save $200 per month on transportation in relation to the national average, they could qualify for a $213,000 loan.
Despite the inherent economic and environmental benefits of LEMs, the product was not in the market for very long. The mortgage industry began introducing competing products, and in 2002, Fannie Mae introduced SmartCommute, which gave borrowers extra credit to household budgets for living near public transportation, allowing them a slight edge in qualifying for loans. LEMs, as developed by CNT and our partners in the Institute for Location Efficiency, were discontinued in 2008.
The legacy of LEMs lives on, in our work, in the work of other like-minded organizations, and in the increasing awareness of the value of location efficiency. It is this awareness that will help our cities create neighborhoods that require less time, money, and greenhouse gas emissions for residents to meet their everyday needs and live well.
We’re celebrating CNT’s 35 years of impact on sustainable urban development through 35 weeks of posts like this one. If you have a story or picture from our past, please share it with Anjuli@cnt.org. Thanks!
CNT’s work is made possible, in part, through generous support from individual donors. Please click here to make a gift in honor of our 35th anniversary.
Next week: #16 IGO CarSharing