Banks Can Play a Major Role in Promoting Smart Growth, If They Want To

I've been limited on time lately so rather than come up with something totally original I'm just gonna riff off of an interesting post I read today.

Over at Streets.MN they're discussing 

the connection between transportation and housing costs

. A well-worn subject to be sure, but the main focus of the post is actually about how banks, not consumers, interpret information about how housing affects transportation costs. And the punchline is that they basically don't interpret it at all; they have all the data they need about where their customers live and work, but choose not to use it when determining mortgage eligibility or lending rates.

This is totally insane, of course, because where you live has a


 impact on your odds of foreclosure, as does where you live relative to where you work and how you get between the two. (If you don't believe me, just type "home foreclosure" in Google Images and see what type of homes come up.) Streetsblog wrote about a study earlier this summer that found

adding ten minutes to average commute time increases the risk of mortgage default by 45%

. Large numbers of people walking or taking rail to work lowers default rates, as does a greater retail presence in a neighborhood, and so on. Banks should obviously care a great deal about this since the balance between "foreclosure" and "not-foreclosure" is how they make their money. And these low-risk communities are exactly the type promoted by organizations like Congress for the New Urbanism and Smart Growth America (and me).

It seems to follow that since walkable, mixed-use communities tend to have lower foreclosure rates, they should also be eligible for lower mortgage interest rates. Fewer people defaulting on their home loans means fewer losses to account for, so the profit that banks need to earn on each individual mortgage can be lower. In turn, those lower rates would increase the appeal of choosing safer, healthier, more sustainable communities in which to live (i.e., walkable urbanism / smart growth).

Advocacy's great—necessary, even—but nothing can make the case for urban living like a sub-3% mortgage interest rate.

Downtown Marquette, Michigan; photo from

Second Wave Media



A little supplementary information/commentary:

Part of the reason why banks


figured this out yet is hinted at by the author at Streets.MN: "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." He's kind of dismissive of this, but it's actually crucially important. It's true that small neighborhood banks are often the ones making the loans for mixed-use buildings and smaller projects, but these banks are by definition capital-constrained. They need to offload those loans to free up capital for additional loans, but if the big banks see the loan as risky or non-standard they may not be as interested in buying them. It's easier to package a thousand cookie-cutter McMansions into a mortgage-backed security than a hundred mixed-use projects of varying heights, masses, retail compositions, neighborhood characters, levels of accessibility, etc.

I admit to being only cursorily knowledgeable about the subject of bank finance so I can't do much to propose a solution, but it seems like there's a place for both government and the private financial industry here. On government's side, the availability of Fannie Mae and Freddie Mac mortgage guarantees needs to be

at least

 as strong for developments in robust walkable areas it is for suburban, single-family home developments (this could either take the form of more support for mixed-use or less for single-family, it doesn't really matter which). Besides the direct benefits, this would also signal to private banks the appeal of this type of housing. On the private side, mostly they just need to be more sophisticated. There are economies associated with standardization, to be sure, but with the amount of talent in the financial industry it seems relatively trivial to develop a standardized means of assessing urban developments for their likely foreclosure risk. From there they just need to assign mortgage rates that reflect the relative safety of these investments and wait for the buyers to flood in.