The Laws of Unintended Consequence

What can we learn from current or previous efforts to link evidence-based outcomes to policy or program development (in the housing sector or elsewhere)?

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The rationale for evidence-based outcomes as the driver for policy includes the following precepts:

• Tests a theory as to why the policy will be effective and the impacts of the policy if successful
• Postulates what will occur if the policy is not implemented
• Incorporates methods to measure the impact
• Examines both direct and indirect effects of the policy
• Must be able to be replicated by a third party

A white paper written in 1999 for the a U.K. Government (“Modernising Government”) postulated that government “must produce policies that really deal with problems, that are forward-looking and shaped by evidence rather than a response to short-term pressures; that tackle causes not symptoms”.

U.S. policy-making for housing over the last forty years has been based on ideologically-led decision-making. Beginning with the Community Reinvestment Act of 1977, U.S. policy in the Congress has been to make homeownership a “human right” and not a privilege as it had been for one hundred years. With the best of intentions, Congress outlawed the practice of “red-lining” which was used by banks and lenders to discriminate against a group of people – those deemed a poor credit risk to own a home. Once Congress intervened and made homeownership a right, government agencies like Fannie and Freddie were pressured to create zero-down loans to accommodate those who had not saved for a deposit. They were encouraged to offer “teaser rates” to get customers to qualify who could not afford the monthly payments required by homeownership. Congress authorized “negative amortizing loans” that added principal to a loan balance to keep monthly payments low because of an erroneous assumption that ”housing only goes up”. Barney Frank infamously bragged that we should “roll the dice” a little longer when warned of a housing bubble in 2003.

Housing policy intended to provide homeownership to those ill prepared for it has cost the taxpayer approximately $200 billion to date. Had Congress used pilot programs to study the effects of intended policy with evidence-based outcomes, they would have seen the defaults by sub-prime borrowers in a local market before it became a national crisis and disgrace. Using evidence-based outcomes as a basis for policy would have allowed policymakers to test ideas in different parts of the country to determine which policy worked best. It did not happen. Instead the ideologically-based philosophy of Washington that led us to standardized forms for Fannie and Freddie, Ginnie and the FHA drove the policy that politicians can devise a standard one size fits all housing policy.

Robert J. Cristiano, PhD is the Real Estate Professional in Residence at Chapman University; a Senior Fellow at The Pacific Research Institute; and President of L88 Investments LLC.

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