Longer Commutes Could Mean Higher Default Risk

A new study soon to be released by the National Resources Defense Council has found that homeowners with long commute times tend to default on their mortgages at a higher rate than those who work closer to home. The draft report studied 40,000 mortgages in Chicago, Jacksonville, Fl, and San Francisco.

The research looked at homeowner’s income and expenses, their credit record, as well as the loan-to-value ratio of the mortgage. Using a complex formula, the NRDC study found that mortgage foreclosures increased with the number of cars owned by a household. In others words, the neighborhood where more households owned cars were also the same locations that had the highest default rates.

One theory about why these two items correlate is that transportation costs, which include gas, are about 17 percent of the average household’s income in the U.S. That comes out to about $8,750 per year. The farther you have to travel for work, the higher your transportation costs are likely to be, which cuts into a consumer’s free cash to pay the mortgage. A spike in gas prices can put an especially strong pressure on homeowner’s ability to pay the monthly note, leading to an increase in foreclosures.

The NRDC is urging banks to factor in travel time and transportation costs when evaluating borrowers for a home loan. Mortgage lenders agree that transportation costs can have a big impact on household’s disposable income, but argue that other factors like unemployment have a much more direct impact.

So the next time you apply for a mortgage will the loan officer ask how far you travel for work and how many cars you own? While that’s an unlikely possibility in the short term, if the NRDC report catches on it could be a future reality.