First the government must restore faith and confidence back into collateralized loans. The whole idea of a mortgage backed security is that it the item you were investing in, the security, was a reduced risk because it was “backed” with a real mortgage. By a real mortgage I mean that Americans had one of the best track records, since the Great Depression, of low defaults on their homes.
Second the credit system tracking/scoring system needs to be fixed. Not having visibility into your own number that determines more than your schooling is insane. Part of that fix needs to be it needs to be limited to what that can be accessed and used for. Just as social security numbers and birth certificates have gone way beyond original intent so have these scores.
Third we need to restore rationality to the housing lending market. High loan-to-value (LTV) loans along with mortgages longer than 30 years, need to stop. This will help restore personal responsibility into home ownership and weed out some speculation and put restrictions on homeowners using their homes as banks. It will also require borrowers to reflect on the cost of the purchase beyond the payment.
We need to end creative mortgage loans. This simply encourages people to shop a payment and never think that they actually have to repay a loan. This would mean ending 35-40-45 year loan terms on mortgages, 1% down 110% loans, etc. Just as in the 1920s housing boom/bust and stock markets with unbridled margin restrictions caused the Depression, housing margin must end as well. This will help restore the demand side of the mortgage and housing industry.
Fourth government needs to fix the supply side in regulation and offering supply. We need to create something similar to the Home Owners’ Loan Corporation to purchase delinquent home mortgages during the Great Depression. There needs to be accountability for the ‘products’ that financial institutions create. Just as toys, cars and drug companies have to submit their products to certain standards so they will not hurt the common good, so should financial services companies. The ‘product innovation’ of the financial services industry has proven that left to its own devices has proven that it has repeated history and crumbled under its own hubris.