The Federal Housing Finance Agency (FHFA)—which regulates the mortgage giants Freddie Mac and Fannie Mae—will explore ways it could “limit egregious rent increases” at properties with a Fannie- or Freddie-backed mortgage. That was announced last week by the White House, in releasing a Blueprint for a Renters Bill of Rights.
The announcement “doesn’t commit the Biden administration or the FHFA to actually enacting rent control,” notes Reason magazine. But the “agency will ‘launch a process’ to consider it.”
Imposing rent control would be very controversial. Almost all economists think rent control is a bad idea: In a 1992 poll, 93 percent of them agreed that rent control reduces the quantity and quality of housing available. Reason writes that “rent control has a history of constricting the supply of rental housing and reducing housing quality.”
As the Wall Street Journal observes, “If there’s any consensus in economics, it’s that rent control achieves the opposite of its intended goal. It leads to housing shortages by discouraging new development and maintenance of existing properties. Rents rise faster in properties not subject to controls. Even 60% of California voters rejected a ballot measure in 2020 to expand rent control.”
Similarly, Reason notes,
Former housing regulators and housing industry stakeholders have criticized the idea for being both counterproductive and likely illegal.
Government-sponsored enterprises (GSEs) like Fannie and Freddie “loan in places where it’s often really hard to get a loan, like a small multifamily building in St. Louis,” says Jim Lapides of the National Multifamily Housing Council (NMHC), a trade association. Lapides says developers would generally just avoid taking loans that come with a rent control requirement. That means that GSEs would see their multifamily business shrink substantially. Developers in more marginal markets where GSEs are a major source of financing would struggle to get capital at all, he says….
It’s ‘legally dubious’ that the FHFA has the power to enforce rent limits, says Mark Calabria, a senior advisor to the Cato Institute and former FHFA director during the Trump administration. Calabria says that during his tenure, the FHFA had performed a legal analysis of whether it could modify existing contracts with landlords to include additional tenant protections and rent caps, and “the conclusion was certainly you can’t really do it.”
The blueprint released by the White House only mentions limiting rent increases on properties purchased with future loans.
Calabria says only limiting rents on new loans “would remove one legal obstacle. But the policy would still have to be reconciled with the agency’s statutory mission to minimize Fannie and Freddie’s losses, which would be a huge stretch.”
Even if imposing rent control is beyond its authority, the Biden administration might still do it. The Biden administration has previously interfered in housing markets without having the legal authority to do so.
For example, in 2021, the Supreme Court rejected the Biden administration’s moratorium on evictions, which went into effect that year after Congress declined to extend the pandemic-related moratorium it passed in 2020. As the New York Times noted, “the administration’s shifting positions had subjected it to criticism from adversaries and allies alike.”
Imposing rent control on properties with federally-backed mortgages would have a big impact, because so many mortgages are federally-backed. The “single biggest force in multifamily mortgages” are the “Government-Sponsored Enterprises,” Fannie Mae and Freddie Mac, which hold “close to 40%” of them. These mortgage giants were created by the government and have federal backing, even though they are nominally private.
Most states have laws banning rent control. In some cases, this is due to voters banning rent control or refusing to authorize it, in referenda. If Biden imposes rent control, he will be ignoring the will of many voters.
Imposing rent control could also harm local governments by reducing the value of housing. By cutting the value of housing stock, rent control reduces the property tax revenue that funds schools and local governments. “Researchers at the University of Southern California said rent control hurt property values in St. Paul, Minn. by $1.6 billion,” reported Market Watch.
As the liberal Brookings Institution notes, “Rent control can also lead to decay of the rental housing stock; landlords may not invest in maintenance because they can’t recoup these investment by raising rents.” Rent control also results in some housing being largely empty, and other housing being crowded as a result, it says:
Rent control can also lead to “mis-match” between tenants and rental units. Once a tenant has secured a rent-controlled apartment, he may not choose to move in the future and give up his rent control, even if his housing needs change…This mis-allocation can lead to empty-nest households living in family-sized apartments and young families crammed into small studios.
