How to Never Repeat the Mortgage Mess

The mortgage industry needs to be overhauled. Here is how to do it.

Currently, mortgages are written by banks or mortgage brokers who often sell the mortgages immediately on the secondary market to other banks or to Freddie Mac and Fannie Mae. These companies then bundle the loans into a bond called a mortgage backed security.

This system needs to change for one reason. The people that write the mortgages do not have skin in the game. In other words, they assume none of the risk. 

There are three possible solutions to get skin in the game for those that write these mortgages.

1. Banks should have to hold the mortgage for a minimum of one year. And, or...

2. Banks should be required to have a "foreclosure interest" in the loan, which would be 20% of the loan amount. This would discourage banks to write risky loans and would make mortgage backed securities safer investments. And, or...

3. All mortgages should be written in two parts. The first should be written to 80% of the appraised value and should be eligible for selling into a mortgage backed security. The second portion should be written and kept by the bank writing the mortgage.