I've been very busy over the past few weeks answering questions regarding the foreclosure mess and the accompanying “robo-signing” dilemma.

What surprises me are not the concerns over systematic risks surrounding the issue or whether or not fraud has occurred, but the fact that everyone I’ve spoken to is shocked that something like this could have happened.

To this I say, have you not been paying attention?

The government initiated HAMP program has failed to address loan modifications effectively and short-sales have failed to efficiently mitigate housing's losses

These two outcomes have played out for the same reason: Four major banks control over 75% of the nations mortgage servicing.  The GSE’s failure too can be linked to Fannie and Freddie controlling over 70% of the nations mortgage-backed securities market during their hay day. Too much control in the hands of the few has ultimately ended in chaos.

The same four major banks have controlled the majority of the mortgage servicing for the past two decades. During that time their primary responsibilities have been the collection of monthly remittances, payments to bond-holders and submission of the accompanying reports. This responsibility was relatively straight-forward and with the ability, in the past decade, to send processes off-shore the profitability grew at an enormous rate.

As annual mortgage volume grew from $500 billion in 1990 to an excess of $3 trillion in 2006 so too did the number of outstanding mortgage accounts that were being serviced by the large financial institutions. As these numbers continued to grow, so too did the number of delinquent files. Unfortunately loan servicers are not properly set up with the experienced personnel or the technology required to effectively managing these delinquent assets. As a result, too many delinquent accounts are being managed by institutions that have not adequately prepared for such an anomaly and we've experienced a massive back-up in the modification/loss mitigation process.

The solution is not simple but it’s doable...

First congress MUST redesign the nation’s Housing finance System to adequately supply the necessary liquidity to meet its future housing needs. This can only be accomplished if congress is willing to address an entire system overhaul and not just Fannie and Freddie.

Congress should also provide the Federal Home Loan Banks the authority to securitize mortgages. This would serve two purposes. It would first help to deleverage the percentage of the mortgage-backed securities market that the GSEs currently enjoy. After all that is what got them into the situation they find themselves today. Owning 70% of the MBS market was doomed to failure. Allowing the FHLB to securitize would also allow the industry to begin to shift some of the servicing responsibilities from the few to the many. Engaging the community banking system to assist in the deleveraging of the big players should be a goal of the administration.  More importantly, however, moving the servicing back down to these local bankers in local markets makes much more sense and improves the odds of future catastrophic failure of our mortgage system.

If the market ever expects housing to contribute 25% to 30% of GDP again, it will require congress to completely overhaul the housing finance system, deleverage those institutions that have enjoyed the “too big to fail” status and let the private markets control housing rather than the socialized housing system currently in place.