Rent Control, Meet Your New Cousin, Rate Control

The media, consultants, lobbyists and other political influences continue to play an increasing role in the political process. The most significant result from their activity is a change in the management style of our government. The management style of our politicians has changed from long-term planning to a reaction style. When politicians in power used long-term planning, they identified problems in the future and passed legislation to avoid those problems. The opposition, in an attempt to gain power, argues against spending energy and capital for something that doesn’t exist. Regardless of this argument being more persuasive, better articulated or correct, it’s still the management style that has prevailed and the one that our politicians have bought into.

The current case in point is the politicians’ management style of the subprime mortgage problem.

While lenders were loaning money to borrowers who were marginally employed with credit problems, at rates that would probably increase beyond the borrowers’ ability to pay, the government did nothing.

While lenders were loaning money while requiring little or no money down as collateral protection to secure the loan, the government did nothing.

While lenders were combining these subprime loans with other mortgages into underwritings called mortgage backed securities (MBSs), and selling them to investment banks, mortgage funds, hedge funds, pension funds, foreign investors, individual investors and service companies, the government did nothing.

While Wall Street and lenders created investment-grade mortgage bonds (REMICs) that separated mortgage pools into different maturity and risk classes ahead of the accounting industry’s ability to set standards for value, the government did nothing.

There are many federal and state agencies paid by tax dollars that are supposed to supervise lending activity. On the federal level, The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. The OCC's nationwide staff of examiners conducts on-site reviews of national banks and provides sustained supervision of bank operations. The OCC reports to Congress who supposedly supervises them. Since 2004, 20% of mortgages in the United States have been subprime. Where was Congress?

Now every politician has a plan to save borrowers, lessen the cost to lenders, reduce the loss to investors and keep servicing companies solvent. Each plan includes freezing (no future rate increase) or reducing the current rate that borrowers contractually agreed to. To prove the merits of their plans, politicians have dragged out a methodology that is a proven failure: static analysis. Static analysis is pejorative term for statistical analyses which take existing trends and project them into the future. It does not consider any changes that may affect the projected result or any unintended consequences.

The most prevalent real estate example of static analysis is rent control. When it was introduced, no consideration was given to decreased investor demand, reduced capital improvements, diminished preventative maintenance programs or the bloated bureaucracies that would continue rent control into perpetuity. I would hope the politicians’ current plans to fix the subprime mortgage problem and resulting affects on the free market have more foresight than their previous forays.