Sen. Elizabeth Warren, D-Mass., outlined five key steps the mortgage market must take to achieve housing finance reform without disrupting the entire system.

While speaking at the Mortgage Banker’s Association 100th Annual Convention and Expo, Sen. Warren made it crystal clear to a massive crowd that reform is 'absolutely necessary.' Yet, she urged Congress to act carefully, saying any hiccup during the creation process will hit middle-class taxpayers the hardest.

"No politics here — we just need to focus on getting housing finance right," the Senator stated.

As a result, Warren has outlined five initiatives that she claims will address moral hazard risk while preserving the good aspects of the pre-crisis housing finance system. She struck a more populist tone by suggesting there's a definite need to scale back the influence of Fannie Mae and Freddie Mac, replacing them with a privately financed guarantee for whatever entity takes over the enterprises.

The guarantee will be limited and conditioned on private capital occupying significant first loss position — making the 30-year fixed mortgage broadly available.

Additionally, market participants need to be adequately regulated, the CFPB architect said.

"It is essential that originators have adequate incentives to access the ability of borrowers to repay their loans," Warren expressed.

She added, "The QM and the proposed QRM rules are a critically important start."

The market also needs to solve the servicer and trustee issues that emerged during the crisis.

Aligning the interests of servicers, trustees and investors in both the guaranteed and private-label market is essential, impacting the size and depth of any housing downturn, the senator said.

Furthermore, the new system should not exacerbate too-big-to-fail issues by increasing the competitive advantages the mega banks have over other institutions, Warren noted.

"A housing market dominated by a handful of Too Big to Fail institutions would reduce access to mortgages in rural and poorer urban areas," she said. "It would also increase systemic risk and reduce innovation and customization in the primary market."

Finally – and most importantly – the portion of the secondary market that is government-guaranteed needs to serve the entire primary market, the senator stipulated.

Given that 70% of loans are sold into the secondary market – if that market isn’t interested in these loans – originators will be less likely to write these loans initially, Warren warned.

The main takeaway from Warren's speech is the $10 trillion housing market impacts every American, and it's not sustainable in its current form.

"Housing finance reform is a complex puzzle, and it will take a lot of work from a lot of people to make sure the pieces fit correctly," the Senator concluded.