could it be that with the ratchet on the end of the stack you could be twisting and binding?
I think it's highly likely that this is part of the problem. The geometry of the blocks/cleat looks like it would definitely make this system difficult to use. Every time you pull on the mainsheet, the whole system will try to twist.
I'm like you and would rather fix it than spend money.
Normally, I would tend to agree because I'm the same way. But in this case, you're talking about fixing a product that is vastly inferior to the Harken / Ronstan systems. There's a reason Seaway blocks went the way of the dinosaur...they just plain suck in comparison to Harken.
With the ratchet to the side seems that the sheet configuration is very easy, given that you start at one side and pass it through the next, block, next block, next block and racthet (it gets to be more complex when the ratchet is on center).
No, not really, as long as you know the proper way to thread the mainsheet with a standard center ratchet, the system will work flawlessly. The problem with this off-center ratchet/cleat is that the mainsheet load will not be centered along the blocks when you pull in the sheet and since the cleat & ratchet are not centered along the blocks, whenever you pull in the mainsheet, the whole system is going to try to twist.
There aren't many parts on an older Hobie that I would say need to be upgraded, but these Seaway blocks were really bad. I would put them at the top of the list for things to upgrade, even if that means just geting a new bottom block and leaving the old upper. You will be amazed at how much better the new blocks are - the cleat operation, the ratchet, the reduced friction, the adjustability, everything simply works better. Really a worthwhile investment if you want to get the most enjoyment out of your boat.