I see two options:
1. Do away with the exile system completely and give everyone who is currently exile a forced choice to become a citizen with Qeynos or Freeport. Get rid of the Haven and change the Betrayal quest so that you are effectively without a city at all until you finish the quest. If it's too long now, shorten the entire betrayal quest down so that the process isn't so time consuming (it has been a LONG time since I've done the Betrayal, but last time it took me about 2 days to complete the process while slacking off on an alt).
2. Remove factions entirely, and allow anyone to live in whatever city they so choose. Fine, force certain classes to 'start' on a certain side to begin with but remove the requirement to betray your chosen class if you want to change citizenship. As a defiler I should be allowed to live in Qeynos, as there's no way that the city knows that I'm a defiler. The fact I'm an arasai shouldn't disqualify me, since I can currently become a citizen of Qeynos just by betraying to mystic. I would still "look" evil, with my arasai features but for some unexplainable reason Qeynos is able to determine that I'm a mystic and therefore a good guy.
In both cases, the deity system needs to be reworked. There's so many directions that could be taken with the deity system to make it overall more viable than it is now. Deity writs could be added (which reward favor) and all miracles/blessings could be redone so that one deity isn't "the" best choice. Relax the alignment requirement for deities in general so that it's not based on city but class if anything. Personally I don't see a reason to keep the alignment restrictions at all, even if the result is a few templars running around worshiping Innoruuk and Cazic Thule or Defilers worshiping Quellious. There will be the oddball combination, but there's no real reason to disallow that even for lore reasons. The actual result will likely be all priests with a power gamer mentality gravitating towards Rodcet Nife, which isn't such a terrible thing.