1. Not everyone should own a home.

Many will find this statement appalling. After all, isn’t home ownership the American Dream? The problem is that the federal government encouraged home ownership and encouraged relaxed lending standards, which allowed unqualified buyers to receive mortgages. Many of these loans had adjustable rates, didn’t require documentation, or required no money down. Is it any wonder that banks were overwhelmed with bad loans?

This leaves us with another problem: Escalating prices. Once you make it easy for borrowers to get money, you increase the supply of buyers. If the housing inventory doesn’t keep up, prices will rise. As a result, you having rising home prices being brought about by a federal government which haphazardly encourage banks to lend, and banks foolish enough to go along with the feds. Of course, this isn’t the only problem.

2. Force banks to take responsibilty for their loans.

I’m not a fan of over-regulation, but one simple rule could have prevented most of the problems we are encountering in the housing sector: Force banks to keep loans they originate on their books for at least 5 years.

As you may know, many banks would originate loans, collect the fees, then sell them shortly after. Why would the banks care if the borrower was on shaky financial ground? All they had to do was keep churning out loans like a mortgage factory, and their profits would keep increasing. By forcing banks to keep loans on their books for at least 5 years, you ensure that banks will do their due dilligence and believe the borrower will be able to make payments regularly. Since many foreclosures happen within the first two or three years, this is a good way to ensure that loans aren’t being quickly sold off and securitized.

There’s no doubt that less interference by the government and more responsibility from banks could have averted the current economic crisis. It could have also been averted if borrowers had used some common sense by realizing they couldn’t afford large mortgages and actually understood the terms of their loans. Of course, in today’s America, expecting people to take responsibility for their actions seems unacceptable.