BANK OF AMERICA INCREASES PACE OF FORECLOSURE FILINGS..PRE-FORECLOSURE NOTICES UP IN AUGUST.......THE BUBBLE BURST....... HOW CAN WE TURN THE REAL ESTATE MARKET AROUND?

Those who read this blog know that I am an avid advocate for real estate investing and that I believe that left to its own device the real estate market will correct itself through American ingenuity and capitalism. But with all of the bad news floating about, and a new surge in Bank of America's preforeclosure filings, I feel compelled to say a few more words about my philosophy and opinion of the way forward out of this real estate crisis.

Four years ago I accurately predicted that the real estate bubble would burst, and that the market was going to experience years of price contraction and stagnation. The major banks and many others bet that through government supports and market manipulation that the crisis was temporary, and that after a short dislocation, prices would level off and the market begin to function again. That logic caused lenders to at first foreclose on a huge number of homes, and then hold those properties in inventory waiting for better days to return. How wrong were they!

Now companies such as GMAC now known as ALLY privately predict that the real estate market will not stabilize and function normally until 2012.Over the last two years I have come to the conclusion that unless the Federal Government and Federal Reserve stop intruding in the market that dysfunction may be normalcy. What does that mean to real estate investors and developers? It is my opinion that the focus of investors in this market should be on acquiring wholesale properties that need rehabilitation and also pre-foreclosure and foreclosure properties that require rehabilitation.

Where should you buy these properties? It is important to survey your market and acquire properties only in areas, or zip codes, were sales are still occurring. Areas around colleges, employment centers, transportation hubs and shopping districts, are more desirable, as students need a place to live, employees want to live closer to their work and public transportation is becoming more critical.

We focus are attention on up and coming neighborhoods, targeting more functionally obsolescent properties. This keeps our acquisition cost down, and allows us to concentrate more of our capital on the rehabilitation of the property. Those properties usually have a much greater return on investment, as the final product has a much higher value.

I believe that if Fannie Mae and Freddie Mac would get out of the real estate business, private investment and prudent lending, would right the market faster and more efficiently. But, in the meantime an investor  should look for obsolescent properties in good neighborhoods and rehabilitate them and they will get a very nice return on their investment.

US ATTORNEY GENERAL SUES BANK OF AMERICA, CHASE AND OTHER MAJORS WILL IT MAKE A DIFFERENCE?

Last week amid great fanfare the Federal Government filed suit against all of the major lenders claiming they defrauded investors by bundling sub prime loans together and selling them as mortgage backed securities. While the effort is commendable on one hand, the real question is will it be effective and how will it effect homeowners who are facing foreclosure, and the real estate market in general.

I am afraid my readers will not like the answer to either of these questions. One of the biggest problems facing the real estate market over the past four years is the politicization of the foreclosure issue. Four years ago the government proposed the mortgage modification program, Make Home Affordable, in response to a growing storm of political criticism that it was not doing enough to help defaulting homeowners stay in their homes.

Most homeowners who attempted to navigate the highway of that legislation, learned quickly that it was a slow trip to nowhere, and that little help was provided by the lenders or HUD. Instead, the lenders used the program as a personal piggy bank granting as many temporary modifications as they could, until that loop hole was closed, and then refusing to grant the majority of qualified modification requests.

Unfortunately, the government in their rush to address the issue (or parenthetically, because they choose not to) did not include any enforcement penalties in the legislation allowing the lenders to reap the financial  benefits from the program without providing homeowners the essential relief they needed. Isn't this the outcome every time the government intervenes in the marketplace to attempt to correct market forces.

If Americans are expecting the government to solve the mortgage foreclosure problem, then good luck to all of us! The law suit may allow Fannie Mae and Freddie Mac to recover some of the ill gotten gains of those who peddled these despicable securities, but I'm not betting on it. The only solution to the current mortgage crisis is to allow the market to unwind naturally. This process will result in prices continuing to fall until the market reaches bottom and then stabilizes. The biggest impediment to that process is the government and lending institutions who are still trying to shirk the consequences of their actions.

If the lenders and the government would allow homeowners to short sale their properties than, the market would retreat in a somewhat orderly fashion. The new mortgages would be based on realistic loan to value ratios, and the real estate markets could begin to function again. This would require both the public and private sector admitting the loss is upon us, and salvaging the distressed assets to begin again. It is akin to realizing that your 1990 Chevy is no longer worth repairing and it is time to trade it in, or send it to the junkyard for $250.00. Or, you could continue to invest in your jalopy and try to sell it for far more than it is worth.  Which is the better choice?

When the market is allowed to function as our founding fathers intended, capitalism will cure the mortgage  crisis. Only through the force of a free market and the passage of time will this problem be solved.