What's a yacht-owning billionaire to do when he wants to take part in the booming buy-to-let market that has created an enormous rent affordability crisis? Why turn to the federal government, of course.

Barry Sternlicht’s Starwood Capital Group and Stephen Schwarzman’s Blackstone Group LP are in talks with Freddie Mac to finance two transactions totaling more than $10 billion, according to people with knowledge of the negotiations. Those discussions come after the government-owned mortgage giant already agreed to back Lone Star Funds’ $7.6 billion deal to buy Home Properties Inc. and Brookfield Asset Management Inc.’s $2.5 billion takeover of Associated Estates Realty Corp.

I know what you are thinking. "No sweat. We aren't anywhere near bubble prices, so it's a no risk loan."
Well, guess what?

U.S. multifamily-building prices are 33 percent higher than they were at the prior peak in 2007, according to Moody’s Investors Service and Real Capital Analytics Inc., a jump stoked partly by the abundant financing from Fannie Mae and Freddie Mac. That’s raised concerns that a bubble is forming that might pop when interest rates rise, according to Levy, the investment banker. Taxpayers could be on the hook for losses incurred by the mortgage companies if apartment values were to fall sharply.

Hmmm. Affordability at crisis levels. Prices at record highs. Fannie and Freddie subsidizing wealthy investors.
Where have I heard all this before?
Let's look deeper.

Fannie Mae, the US government owned mortgage giant has rolled out a new program called Home Ready.
Borrowers that they can obtain a 3% downpayment mortgage with no minimum cash contribution. And why not? If this doesn't work the taxpayer will pick up the tab.

Oh, wait. They got that covered too.

(MarketWatch) — Fannie Mae and Freddie Mac are at risk of needing an injection of Treasury capital after the latter reported its first quarterly loss in four years, the director of the Federal Housing Finance Agency said Tuesday.
FHFA Director Mel Watt issued a statement following mortgage-finance company Freddie Mac’s $475 million third-quarter loss, its first quarterly loss in four years.
“Volatility in interest rates coupled with a capital buffer that will decline to zero in 2018 under the terms of the senior preferred stock purchase agreements with Treasury will likely make both Enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws going forward,” Watt said.
Freddie Mac said its loss was driven by interest rate changes that soured the value of derivatives it holds.

So Fannie and Freddie are subsidizing billionaire real estate developers at bubble prices, while at the same time getting bailed out by taxpayers due to losses on a largely unregulated derivatives market. Interesting.
This sounds vaguely familiar. Give me another hint.

Fannie Mae recently lowered lending standards.

No credit score? No pay stubs or tax records? No problem.

To put this into perspective, this is what Kevin Watters, CEO of Chase Mortgage Banking, had to say.

"FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5% down; that's subprime lending, and we're not in the subprime lending business," CNBC quotes Watters saying.

But what matters is that Fannie and Freddie are making homes for affordable to everyone, right? How's that working out.

It's on the tip of my tongue. Wait! Don't tell me. Let me guess. Give me another hint.

House flipping is back.

According to data from RealtyTrac’s Third Quarter 2015 Home Flipping Report, the percentage of flipped homes in the U.S. rose by 18 percent during Q3....Why so many properties being flipped? Quite simply, because it’s profitable now. According to RealtyTrac, there was an average $62,122 difference between the purchase price and flipped price, not including rehab costs.

I've almost got it. Just one more hint.

Commercial real estate prices are now officially higher than they were during the bubble years, Moody’s/Real Capital Analytics reported this week.
Led by solid increases in prices of multifamily and office buildings in Central Business Districts (CBDs), the adjusted Moody’s/RCA all-property price index rose 1.5 percent above a high-water mark established before commercial real estate prices collapsed eight years ago.

There are very big differences this time around. The biggest difference is that the poor and subprime have been left out of this echo bubble. Even at artificially low interest rates, the poor and first-time homebuyer has been unable to buy into this bubble.

This land rush is being done by the cash-flush wealthy. Which means that this bubble will play out in a very different way.
I know some will take offense at my using the term "bubble", especially since the price of single-family homes is significantly below the 2007 peak, but that misses two very big points.

First of all, this is a bubble by the wealthy, so the bubble prices are showing up first in commercial real estate and multi-family homes. In other words, larger, more expensive purchases.
Secondly, even if prices are below 2007 levels, they are only slightly less insane.

Home values have jumped 34 percent since reaching a bottom in early 2012, making purchases more expensive for entry-level buyers.

Home prices are increasing at 13 times the rate of wages. The Housing Affordability Index dropped 12% in just the first five months of 2015.

Fewer people owning homes should mean less pressure on prices to move up, but that's not what's happening. For that reason we need to look deeper into this story.
How is it possible that the price of a commodity (i.e. housing) can increase so much faster than the ability of people to afford it?

Enter the investor.

In many markets, the housing recovery has "largely been driven over the last two years by buyers who are not as constrained by incomes -- namely the institutional investors coming in and buying up properties as rentals, and international buyers coming in and buying, often with cash," Daren Blomquist, vice president at RealtyTrac and author of the report, said in an interview.

In other words, inequality is driving this trend. The wealthy see housing as an investment, while the working class see it as a necessity. Blackstone alone owns 150,000 homes that it bought in order to rent to working people. Most of those homes were foreclosures, which Blackstone then rents to people who were often previously foreclosed on. Wealthy foreigners are also buying up tens of billions of dollars worth of houses every year.
It's not a coincidence. Housing is one of the most heavily, taxpayer subsidized sectors of the economy. The public benefits fall disproportionately upon the wealthy, while the poorest are left out almost entirely.
The rational decision would be to stop publicly subsidizing an asset class with disproportionately high prices that is causing general suffering amongst the working class. But politics dictate that this won't happen.

To be fair, this echo bubble has allowed Fannie and Freddie to pay back the entire cost of the 2008 bailout, and more. But these enormous companies have remained unreformed, and the taxpayer continues to be on the hook for almost the entire secondary mortgage market.
Most people have forgotten that in 2008 Fannie and Freddie failed the week before Lehman Brothers did, and in doing so they triggered the enormous financial dislocation that brought down the derivatives market.