Location Effiecient Mortgages are a very good idea, although they are not having the result you would expect. On paper, the idea seems to work perfectly and you wonder why they are still not used by tradional lenders everywhere. I found a few articles that described the downsides of LEMs and why its implementation is been so difficult.
First of all, it seems that the political support for developing the LEM program nationally is still not there. Since its creation, the program has been tested in a few cities, but the lack of a proper mechanism to evaluate the results seems to discourage politicians. Second of all, there are a few articles that suggest that the one of the problems of LEMs is that the project sponsors and not the lending institutions, which ultimately undermines the influence over the secondary mortgage market. This leeds to the next disadvantage which is the probability of default of LEMs.
I don`t know how much of this is true since evaluation of LEMs is not very developed, but i read two studies that suggested that LEMs default rate is higher than traditional mortgages. On the contrary, other articles advocating for LEMs supported the idea that they have no risk default associated. This difference in opinions make me think that lenders are still uncertain about the risk associate to this types of mortgages and therefore are a bit reluctant to its development.
One the studies that showed to more light to the issues behind the underwriting of LEMs and why Fannie Mae has not support the program in a stronger way is one performed by the Minessota Department of Transportation. The study is from 2005, but i think it is interesting because it was based on interviewes to loan officers and other people involved in the underwriting process. Some of their anwers suggested that Fannie Mae was not yet convinced about the underwriting process and the risk associated to the LEMs.
In my opinion, there seems to be some reluctancy from lenders to push the LEM program. The risk associated seems to be unclear and this raises a lot of questions in the secondary mortgage market. The subprime mortgage market experience probably does not help either to motivate secondary markets to invest in this type of mortgages. A better evaluation of the results of these mortgages is needed in order to rule out any doubts about the economic viability of LEMs.
Here are the links to some of the articles i read about LEMs.