What is it? A transportation efficient mortgage (TEM) is a way for homebuyers to finance the purchase of a home in a neighborhood that is

Such neighborhoods are considered 'transportation efficient' because they provide more convenient opportunities for household members to walk, bike, or take transit for many of their work, shopping, and leisure trips as compared to the many typical suburban neighborhoods (where a car is needed for most, if not all, trips). By driving less, households in transportation efficient neighborhoods save money on gas, maintenance, and fees for parking and tolls. In addition, these households may be able to save even more money by delaying the purchase of an additional automobile, selling one (or more) of their existing automobiles, or becoming a completely 'car-free' household.

The premise of TEMs is that each dollar a household saves on transportation costs is one additional dollar that the household can use to pay a higher mortgage payment. A TEM considers the 'transportation savings' that accrue to households that drive less (or not at all) and adds the amount of this savings to the household's income, thereby allowing the household to qualify for a larger loan, a smaller down payment, and/or a lower interest rate than they would receive with a traditional mortgage (based solely on the household's income and existing debt). TEMs leverage the home-buying power of households who choose to purchase a home in denser, mixed-use neighborhoods that provide a variety of convenient transportation options, allowing them to purchase 'more home for the dollar.' For many housing submarkets (including 1st time buyers and empty-nesters), this incentive can make urban living more attractive, thereby encouraging home buyers to remain in or return to urbanized areas with existing public infrastructure (utilities, roads, etc). Thus, TEMs are a market-based policy tool that provide financial rewards to urban homebuyers, while at the same time potentially promoting many important public interest goals as well (as discussed in the next section).

Why use it? The potential benefits of transportation efficient mortgages can be divided into four categories: land use benefits, transportation benefits, affordable housing/community development benefits, and fiscal benefits.

To realize all of the benefits listed above, TEM products should be implemented in conjunction with other policies that promote compact development and alternative travel modes. This is because preliminary evaluations of TEMs' effectiveness suggest that they are unlikely to realize significant benefits if implemented as a stand-alone policy (see 'Is This the Right Tool for You' section for additional information on how to design a TEM program that will work best in your community). The bottom line: TEMs should not be considered a magic bullet, but rather as one piece of a coordinated strategy to link land use patterns and transportation in your community.

How does it work? As of this writing, there are two types of transportation efficient mortgage products: the Location Efficient Mortgage® (LEM) product and the Smart Commute MortgageTM (SCM) product. Each mortgage product calculates the savings from living in a transportation efficient neighborhood in different ways.

Location Efficient Mortgage. The LEM uses a formula that calculates an 'efficiency value' for each neighborhood in the lender's market using variables that measure different aspects of a neighborhood's form and design that are often thought to be associated with reduced levels of automobile ownership and use. These variables include higher than average neighborhood densities, mixed land uses, convenient access to public transportation, and pedestrian and bicycle 'friendliness' (i.e., walkability and bikeability). For more information on the relationship between land use patterns, urban design, and people's travel choices, see the Victoria Transport Policy Institute's (VTPI) online report Land Use Impacts on Transport: How Land Use Patterns Affect Travel Behavior , or jump to the 'Other Resources' section below.

The amount of money the household will save in transportation costs by buying a home in a particular neighborhood is then estimated based on the efficiency value of that neighborhood: the more transportation efficient the neighborhood, the more favorable mortgage terms. The map below shows the efficiency value calculated for different neighborhoods in Seattle, one of the LEM test markets. To see how the different efficiency values of different neighborhoods can translate into a larger mortgage for homes in more 'transportation efficient' neighborhoods, check out the 'LEM Advisor' website for the Seattle market. For more detailed information on how the efficiency value is calculated for the LEM product, see the 'Determining Location Efficiency' section (on page 11) of Location Efficient Mortgages: Theory, Applications, and Prospects for Smart Growth.

The relative transportation efficiency of different Seattle neighborhoods calculated for LEM product. Source: City of Seattle, Office of Housing

Smart Commute Mortgage. In contrast to the LEM product, the Smart Commute Mortgage (SCM) product uses a much more simplified method for calculating the transportation efficiency of a given neighborhood: essentially, any home within walking distance of a bus stop or rail station (defined as ¼ mile) is considered to be located in a transportation efficient neighborhood. This is based on the premise that households located near transit stops are better able to take advantage of transit for many of household trips, and that transit is also more likely to serve denser neighborhoods where household members can bike or walk for many local trips. Thus, purchasing a home within a ¼ mile to a transit stop is considered to be an indicator of a household's increased likelihood to travel by transit, bike, or on foot and such households are therefore assumed to be able to save a fixed amount per month in transportation costs. This estimated transportation savings is then added to the homebuyers' total income, thereby qualifying them for a larger mortgage.

 

LEARN MORE Calculating Transportation Costs for Your Region (pop up window)

To participate, a homebuyer, realtor, or lender first determines that a home is located with ¼ mile of a transit stop by using Fannie Mae's online GeoCoder, by consulting with the local transit provider(s), or by touring the neighborhood where the home is located. Then, the difference between the average transportation costs of households in the region that travel primarily by automobile and those that travel primarily by transit, bike, and on foot can be calculated using data from national or regional transportation surveys. For example, the SCM program in the Minneapolis/St. Paul metropolitan area estimates that homeowners will save $200 a month, or $2,400 a year, by reducing or eliminating automobile trips and traveling primarily by transit, bicycle, or on foot. See the sidebar Calculating Transportation Costs for Your Region for more information on how you can determine average household transportation costs in your region.

For more information about the relative merits of the LEM and SCM method of determining a neighborhoods' transportation efficiency, see the section 'How to Put this Tool into Action in Your Community,' or jump to the 'Toolkit Links' and 'Internet Resources' sections to link to materials that provide more detailed information on each.
 

LEARN MORE How are Traditional Mortgage Terms Calculated? (pop up window)

Despite the different methods used to calculate the 'efficiency value' of a given neighborhood, once a neighborhood is deemed transportation efficient, the two TEM products work in essentially the same way as traditional mortgages (for more information on traditional mortgages, see the sidebar How are Traditional Mortgage Terms Calculated?). Potential home-buyers learn about the availability of TEMs from their realtor, their lender, or from a local marketing campaign. Based on the household's gross income, size, existing debt, and credit history, participating mortgage lenders calculate the base mortgage amount that the household qualifies. The household's gross income is then increased by the amount of the predicted transportation savings assumed to accrue from living in a transportation efficient location, and the loan amount the homebuyers qualify for under the TEM is recalculated. For example, consider a hypothetical calculation of the transportation savings using the LEM method for a home in the Edgewater neighborhood in Chicago, which is a dense, urban neighborhood on Chicago's Northside that is well-served by transit and conveniently-located to downtown. The LEM efficiency formula would predict that a household with two people, an annual income of $60,000, and one car that wanted to purchase a home in this neighborhood would save an estimated $350 a month in transportation costs (or $4,300 a year). This transportation savings would be added to the household's gross income, thereby allowing them to qualify for a home selling for approximately $212,200, compared to qualifying for a home selling for approximately $158,300 under traditional mortgage underwriting guidelines. In this scenario, the LEM product would therefore have increased the household's home-buying power by approximately $53,700 (adapted from the online article Fannie Mae in Chicago, originally posted at www.fanniemae.com/partnershipoffices
/chicago/story1.jhtml?p=Affordable Housing & Community Development).

In addition to qualifying for a larger mortgage, TEMs allow homebuyers to provide smaller down payments (usually 3% of the purchase price) than is typically required with traditional mortgages, where the conventional rule-of-thumb has traditionally been 10% of purchase price. Additional perks and incentives are often provided as part of the TEM package, such as free or discounted regional transit passes (usually for a period of one or two years), free or discounted membership fees in a car-sharing cooperative (where available), or vouchers and discounts redeemable at local bicycle shops. For specific details on how the Twin Cities Metropolitan Council introduced a TEM product in the Minneapolis/St. Paul region, see the case study profile in the 'Who Else is Doing It?' section.