NEW YORK ( TheStreet) -- With the losses growing on the JP Morgan ( JPM - Get Report) derivatives trade, it's time to review why the great credit crunch continues. In addition, I will provide some ideas on how to fix the mortgage market and jump start new home construction on Main Street, USA.

More than a year ago, the government panel called Financial Crisis Inquiry Commission blamed banks that made reckless bets, credit rating agencies that endorsed risky mortgage-backed securities and government regulators who overlooked warning signs until they threatened the global financial system.

The way I see it, there were many culprits

The "too big to fail" Banks packaged mortgages into securities that sliced and diced all types of loans and sold them to clients around the world as AAA-rated. In the case of Fannie Mae and Freddie Mac, Wall Street firms sold these securities as though they were backed by the "full faith and credit" of the U.S. government when they were clearly not.

The credit rating agencies stamped "AAA" ratings on the mortgage securities that were laced with subprime components which became toxic.

Community banks ignored regulatory guidelines and became overexposed to real estate loans including construction and development loans, and other commercial real estate loans.

The Federal Reserve, by pushing the Federal Funds Rate below 3%, was probably the most significant cause of the great credit crunch. On Oct. 2, 2001, the Greenspan Fed cut the funds rate from 3% to 2.5% and continued cutting the rate to 1% on June 25, 2003 on fears of deflation. As a result, the Fed fueled the housing bubble and began the bubbles that still exist in various degrees in many commodities markets.

In June 2004, the Fed began to raise the funds rate at 25 basis points in each of the next 17 FOMC meetings to 5.25% on June 29, 2006, which was the one catalyst for breaking the housing bubble. Beginning on March 18, 2008 the Fed cut the funds rate by 75 basis points to 2.25%, again below 3%. The funds rate has been at zero to 0.25% since Dec. 16, 2008 with new bubbles in commodities and equities, with the housing bubble still deflating and with toxic mortgage securities still sloshing around the banking system.

The FDIC allowed about half of the nation's community banks to lend too much money for C&D loans and CRE loans. There were regulatory guidelines in place since the end of 2006 jointly established by the FDIC, Federal Reserve and the U.S. Treasury to limit these exposures, but were ignored by these key banking regulators. In one of his testimonies, I heard Fed Chief Bernanke say that banks do not have a limit on commercial real estate lending? I guess he denied the existence of the regulatory guidelines with regard to CRE loans, which limits a bank's exposure to 300% of risk-based capital.

The U.S. Treasury begged for the $700 billion TARP, which was supposed to buy troubled assets in what was called Troubled Asset Relief Program. When this proved to be unworkable because no one could establish fair market valuations for so-called "AAA" rated securities, the U.S. Treasury forced the bigger banks to take billions in loans from TARP. Smaller community banks begged Congress for TARP money and many received funds even though they were in violation of the regulatory guidelines. TARP money was used by Congress as a slush fund to aid small town bankers who supported their elections

The homeowner lacked common sense and signed on the bottom line on mortgages that they could not understand and could not afford.

It's hard to play the blame game when there are still problems ingrained in the housing market, the mortgage market, the banking system, and toxic mortgage securities still off balance sheet at those "too big to fail" banks, which are now bigger thanks to being bailed out.

The Federal Reserve should use its balance sheet to help the housing market and community banks.

As U.S. Treasuries and mortgage-back securities and debt mature from the Fed balance sheet, some of the proceeds are funneled to the FDIC to lend to healthy community banks. These banks would then offer a refinancing program for mortgage holders who are current on their mortgage payments. The rate on the 30-year fixed rate mortgage would be set at 100 basis points above the yield on the 10-Year U.S. Treasury.

Today, the mortgage rate would be 2.75% with the 10-year yield at 1.75%. These loans would be pooled into a GNMA government-backed mortgage pass-thru security, which is sold to the Federal Reserve as an investment on the Fed's $2.5 trillion balance sheet. A similar structure could be established to create a pool of construction and development loans.

Another feature of this mortgage idea is to allow the homeowner to buy his mortgage into a retirement account, which would make monthly payments from retirement money without penalty or tax consequences.

Another idea to help all homeowners is to allow mortgage holders to take a long-term capital loss deduction on their taxes if they sell an underwater home. The dollar amount of the loss versus purchase price could be amortized over 10 years. This would help those considering moving for a new career opportunity.

This Main Street refinancing plan will create jobs and help stimulate the economy and will not cost taxpayers a dime.

Let's look at the damage done to JP Morgan Chase ( JPM - Get Report) after this "too big to fail" revealed its risky trading of derivatives. The daily chart shows an extreme oversold condition as the stock plunged below 21-day, 50-day and 200-day simple moving averages at $40, $42.55 and $35.50. My semi-annual value levels are $29.26 and $27.77 with my quarterly pivot at $35.13. JPM stayed with a hold rating throughout this decline, according to ValuEngine.com.

At the time of publication, the author did not own any of the stocks mentioned in this article.