So we all know that banks have admitted to robo-signing, a process whereby employees sign foreclosure cases without verifying the veracity of the documents. We also know that banks have tried controlling the negative effects by freezing foreclosure sales in most states (and even all for a number of banks). But what we don’t know is that the issue at hand is bigger than what they are all letting us on.

There have been talks about the effects of the foreclosure freezing on foreclosure buyers, homeowners who are facing and have faced foreclosures, and the housing market in general. But nobody has ever really touched on the real issue: who has the right to foreclose on properties? The ownership of loans is what everybody should be talking about; and everybody should also know that no matter what the Obama administration says, foreclosures are still governed by state law and not federal jurisdiction.

Georgetown University Law professor Adam Levitin, who specializes in financial regulatory issues and mortgage finance, discussed in a recent conference call between Citigroup and its investors and clients the adverse effects of the mortgage mess. According to the professor, the documentation problems can cloud the title on both foreclosed mortgages and performing mortgages. Furthermore, says Levitin, real estate analysts should start looking at the negative results of cutting corners – e.g. securitization and modernization.

It used to be that real paper is required during transfer of documents and titles but making real estate systems electronic has disregarded that rule. This has caused the whole mess since mortgages and property titles change hands during home purchase from originators to securitization sponsors to depositors to trusts. The note, which is the IOU in the mortgage, and the mortgage, which is the security proving house was made collateral, and even the assignment of the note and security instrument is held by the trustee.

The final stage presents the issue of getting to the trusts. Levitin says that affidavits assigned to the notes and security instruments are meant to be endorsed over to the trust at the time of sale. With the recent mess, affidavits have been backdated illegally.

The real estate system has indeed become a chaotic thing. And though people should stop hoping that things will get better in the soonest time, real estate insiders should start admitting that the issue is bigger than what they are willing to admit. Only then can everything move forward and a solution to the problem could be formulated.