Mortgage regulation?

So I've been reading about the whole sub-prime issue, and seeing the different "fixes" for the problem... I see the conservative (caveat emptor) and the paternalistic view (people need to be protected from their own choices because they are incapable of making the right choices), and I don't buy either in their pure form.

Is there a middle ground? I think so. I think people need to be protected from a lack of information / misinformation, but cannot and must not be protected from the consequences of an informed decision - no matter how inappropriate the decision is.

So: regulate disclosure, so that the mortgage market suffers from less asymmetric information, and, having armed the borrower with enough to make an informed decision, let the borrower beware.

No small print, no hidden terms, and then, if the borrower proceeds with the contract, the lender's liability should only be limited to failure to disclose or gloss over a disclosure to close the deal.

If the lender/broker influences the borrower to not worry about the terms / borrowing limits/ payment / rates in future periods, that is a violation of the code of conduct and creates a potential liability. If the lender makes all appropriate disclosure (regulation needed to determine what constitutes appropriate disclosure), the lender has met his/her duties, and should be insulated from the legal consequences of the loan - though not, obviously, the financial consequences.

In either case, I don't think anyone who buys the mortgage from the lender / broker should be liable for anything. We cannot have a secondary market if every purchase transfers the liability and therefore the onus of ensuring that every individual mortgage in the security meets standards. We can have a secondary market even if individuals make poor choices that cost them their homes... The pricing of the security will reflect the risk, and may lose value, but the market provides liquidity to the market, lowering rates for everyone and bringing the American Dream within more people's reach.

Any thoughts??