If we were to rebuild the mortgage market from scratch, what would it look like?

A system specially designed for this purpose
Every mortgage market is a patchwork. Rules, products and features exist because of past events, a crisis, a policy choice or market failure. The result is a structure that reflects history more than design. That doesn’t make it bad, but it does mean that we carry baggage with us that limits the system’s capabilities.

Mortgage markets around the world are defined by their history

The US introduced the 30-year mortgage rate during the Great Depression as a policy response to stabilize households and lenders in the face of mass bankruptcies. In Israel, hyperinflation in the 1980s prompted CPI-indexed principal lending, aligning debt obligations with real prices to maintain the viability of the system. In Britain, the high and volatile inflation of the 1970s and early 1980s pushed the system towards variable rate mortgages, shifting the risks of interest rate movements more directly to households.

Every country has similar stories: products and structures built in response to the crises of their time. Over decades, these layers of responses have hardened into a patchwork system that is increasingly difficult to reform. What worked to solve yesterday’s problem may no longer be appropriate for today’s challenges, but inertia and legacy make change difficult.

Home ownership is remarkably ‘sticky’

Over time, ownership percentages change little unless something fundamental changes in the financing system. From 1750 through the Great Depression, American homeownership hovered around 46.5% ± 1.5%. It was not until the introduction of the thirty-year fixed rate mortgage, modern amortization schedules, federal housing agencies, and the GI Bill after World War II that interest rates began to rise. Between 1940 and 1970, ownership rose steadily from ~45% to ~65% as this structural support took hold.

“The homeownership rate is stubbornly stable – it will only change if there is a major systemic redesign.”

Don Layton – CEO of Freddie Mac, 2012-2019

Since then, the number has barely dropped. Over the past fifty years, US homeownership has fluctuated within a narrow range of ~65% ±2%. That stickiness leaves both the deep, enduring appeal of homeownership – and the fact that only system-wide reforms, not marginal adjustments, can meaningfully change the dial.

If we were to build the mortgage market today, we would not be limited by that past. We would start with the goal: to finance household consumption of housing. Housing is essential, and homeownership provides benefits that extend beyond the individual to families, communities and society as a whole. The aim of the system is to give every household that wants to own a home the means to achieve this – sustainably and fairly.

Capitalizing on stakeholders’ strengths

A clean slate market would recognize the strengths and weaknesses of each participant:

• Households are the consumers of housing, but also the weakest financial entity in the system. They need stability, transparency and fairness – not complexity or excessive risk transfer.
• Banks and credit unions excel in origination – marketing, sales, underwriting and operations. They should continue to serve as the primary interface with borrowers. But they are not strong in long-term asset management; Forcing them to bear maturity and prepayment risks weakens them and the system indefinitely.
• Investors and capital markets are best at managing long-term assets, identifying price risk and providing liquidity. A clean slate system would give them standardized, transparent tools to absorb the risks that banks should not have to bear.
• Real estate agents serve as advisors and guides. Today, their incentives are too often tied to volume and not results. In a redesigned market, agents would be rewarded for matching households with products that are sustainable in the long term.
• Supervisors and policymakers should focus on transparency, fairness and system stability, and not on product micromanagement. Their role is to ensure trust, not stifle innovation.

In short: every player should focus on what he is good at.

Product design: global learning, local innovation

No country has a perfect system, but every country has characteristics worth learning from:

• Portability of mortgages (Canada, Europe): A loan that moves with the borrower, reducing lock-in and increasing labor mobility.
  Imagine if a homeowner with a 3% mortgage rate could withdraw their loan (and its terms) when they move. This seems intuitive, but is extremely difficult to implement in the US market, mainly due to the securitization of mortgages, and many lenders are not national.
• Indexed products (Iceland, Israel): Link payments to inflation or wages, align obligations with real family capacity.
  Imagine a monthly payment tied to the borrower’s salary – small when he is young and just starting out, and increasing as his income increases. Or imagine if the monthly payment was linked to the actual price of housing consumption, also known as rent.

“We can’t solve problems by using the same thinking we used when we created them.”

Albert Einstein

• Negotiable Mortgage Bonds (Denmark): Standardized securities that provide liquidity to investors and lower costs to borrowers.
• Composite products: Hybrids that start fixed and gradually transition to indexed or floating structures, balancing stability and flexibility.

We also need to innovate beyond what already exists:

• Stock-like characteristics for households: Nowadays a mortgage is purely debt. Yet companies raise capital with a mix of debt and equity. Why shouldn’t households have access to similar mixed structures – for example products where investors share the increase in home values ​​in exchange for a lower debt burden?
• Aligned incentives: Credit officers should not be rewarded solely for production volume. Their incentives should take into account the long-term performance and risk profile of the assets they help create.

Incentives and coordination

A redesigned system would carefully balance short-term and long-term incentives. Current structures often prioritize immediate reimbursement, leading to volume-driven origination and weak long-term discipline. If we want a healthier market:

• Originators should benefit if loans perform well over time.
• Administrators should be rewarded for high-quality customer outcomes, not just collections.
• Investors must be able to trust that the risks are transparent and reasonably priced.

When incentives across the entire chain – households, lenders, brokers, investors – align, the system becomes both more stable and more inclusive.

Main Street and Wall Street: Partnership, Not Opposition

The relationship between Main Street and Wall Street is often described as adversarial: households on one side, investors on the other. But in a clean slate system the two would be partners.

Capital markets have the depth and tools to absorb risk. Banks and credit unions have the relationships and distribution networks to do this responsibly. Households bring demand, confidence and repayment capacity. Aligning these three is the only way to create a housing finance system that is sustainable at scale.

The market we need to build

“Yesterday’s home runs don’t win today’s games.”

– Babe Ruth

If we were designing today, we wouldn’t settle for a one-size-fits-all debt instrument that traps households, overloads banks and leaves investors navigating opaque products. We would build a system that:

• Gives households flexible, portable and even equity-like options to finance ownership.
• Let banks focus on originating and servicing assets, not storing assets for the long term.
• Provides capital markets with standardized, transparent channels to finance housing.
• Rewards brokers and loan officers for long-term results, not just short-term volume.

The result would be a mortgage market that increases access to homeownership, distributes risk across the right balances, and strengthens both local communities and the broader financial system.

We cannot erase history. But we can learn from it, here and abroad, to imagine something better.

Jonathan Arad is the CEO of Takara.
This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners. To contact the editor responsible for this piece: [email protected].

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