The Beginning of the Bailout?

Freddie Mac, the second largest home lender in the United States, has announced it will buy $20 billion in subprime mortgages in an effort to clean up the subprime mess.

While congressional leaders state they are against a federal led bailout of the subprime market, Freddie Mac was established in the first place by Congress to help provide money for homebuyers looking to borrow.

The subprime market lent money to people that had bad or weak credit history but who wanted to get in on the U.S. housing boom that peaked in 2005. Today, depending on which estimate you believe, more than 13% of subprime borrowers are late on their payments.

I remember all too well the direct government bailout of the loan and thrift mess of the mid-1980s. Back then, the Federal Government set up the Resolution Trust Corporation to sell (more like liquidate) about $100 billion in properties.

In 2007, with years of inflation and Fed induced liquidity behind us, $100 billion is a drop in the bucket compared to the amount of mortgage debt outstanding today in America. How deep will the subprime crisis hit? How difficult will it be for consumers with less-than-stellar credit to refinance? Will there be an explosion in the number of U.S. home foreclosures?

While it is too early to answer these questions, all I can tell you is from what I’ve learned from 25 years experience as a real estate man: The bigger the boom, the bigger the bust. As an avid researcher of U.S. economics, I have yet to come across a period in time when a soft landing follows a period where prices of American properties have boomed. And I’m proud to report I’m one of the few economists that had correctly forecasted a bust in the U.S. property market to the magnitude we have seen.