The Terror of the Mortgage Pools

Used to be, when you bought a home your mortgage was owned by a local bank. They were called savings and loans. The bank held the loan until maturity.

Maybe you did or maybe you didn’t know the loan officer. In time, the local savings and loan became a branch office of a bigger bank. But they held your mortgage. You knew where it was, and it was a plain vanilla matter knowing the return to expect if you invested in a share of a savings and loan.

By charter, savings and loans were conservative institutions. That is because real estate, traditionally, is a conservative investment. “Real”, as in tangible. “estate”, as in property.

In the past decade, Congress and Wall Street benefactors turned everything inside out: it was no longer enough for real estate to represent the most significant asset in most people’s lives.

Under loosened regulatory controls and the intent of “diversifying risk”, the Federal Reserve allowed credit to proliferate the way a genie conjures smoke from a bottle.

Today your home mortgage is a data point to investors in mortgage backed securities or the synthetic instruments derived thereof.

The investors—who could be from Kalamazoo or Katmandu—have only a semi-tangible link to you: a rating agency.

Who knew the mortgage you owe disappeared into the ether of financial derivatives?

The mortgage your local banker used to underwrite is now used to proliferate credit in 10, 20, 100 times the mortgage value.

Your mortgage literally disappeared, and every time it disappeared it rained commissions to traders and Wall Street investment bankers.

Of course it’s not your mortgage alone: it’s hundreds of thousands, millions of mortgages from homeowners with similar credit profiles, square footage requirements, beds and bathrooms as yours, all mashed together in credit-worthy instruments that summoned interest rates higher than debt otherwise tied to US taxpayers and, so, of interest to investors.

But this is not how I came to understand the terror of the mortgage pools.

That happened differently.

A decade ago, I was driving to a youth soccer game at a park I had never visited in a platted subdivision in suburban Miami.

I knew roughly the coordinates of the park. But as I turned into the subdivision, covering many units of measurement and distance, there were so many cul de sacs and sections of the subdivision inaccessible from adjacent ones except through unmarked arteries I began to despair in the way Kafka might have with his son in the backseat of the carriage, hurrying to a recital.

I asked several people who were walking or stopped in cars: the field had to be less than a mile away, but every direction looked the same and not a single passerby knew that a field even existed there.

Eventually I found my way. I never forgot my informal roadside poll.

I had a similar experience, a few years later, on a rain-slicked night in Salt Lake City where suburbs materialized in the thin air from one visit of mine to the next.

At convenience stores on a congested suburban artery, I asked attendants where the nearest supermarket was. No one knew.

After driving aimlessly, I stumbled across one, a few stoplights and turns later.

Now you can assign various conclusions to these observations: that, Americans are idiots. Or that, Americans I meet are idiots. Or that, my sample polls are too narrow. Or that, I ascribe a sense of aimlessness to society where individuals are so busy being productive, we are doing our best while traveling our own alleyways of life.

Around the same time, I had another epiphany in a Florida town called Wellington. Again it was a youth soccer tournament in consecutive years at the edge of the Everglades that drew me in.

(You are wondering if I only have epiphanies at youth soccer tournaments near the Everglades. I promise, no more. There is a point: that southeast Florida has been so badly developed, with so little lack of concern for public spaces, the only sports fields with acreage adequate to the purpose are where open space still exists, at the edge of the Everglades. There, the pressure of millions of people to recreate converges with the pressure to build new suburbs and resolves, once in a while, with the creation of a regional park big enough to hold a youth soccer tournament.)

One year, the park was in the middle of farmland. Nearby, tractors and graders were building a six lane road from scratch, in the middle of what appeared to be nowhere.

The next year, the park was dwarfed by more road construction, pavement, buildings, developments with banners flying out front. Where the graders had been the year before, a massive super-mall was open, with hundreds of thousands of square feet of retail opportunities where none had existed but for cows chewing cud still appear in the rear lots behind strip malls and retail and feeder roads and subdivisions all growing apace, probably allowing an agricultural tax deduction for another distant investor.

Everything was pink, the color of stucco in the ubiquitous Mediterranean style, and white, the color of fossilized coral ground up for cement and fill.

The mall was new and empty: customers hadn’t arrived yet in the form of sufficient numbers of homebuyers for the thousands of units in subdivisions under construction.

But I found a store selling the paintings of the charismatic artist, Thomas Kincaid. This is the sharing moment.

Maybe you know Kincaid’s work. His paintings are fully saturated landscapes, often at dusk where the home—the central feature—is bathed in glowing light and Christianity, served by nature darker at the fringe but pulling in towards warmth of the family hearth, with sincerity that bore absolutely no relation to the zero lot line condominiums sprouting up in the Wellington heat, as though Miracle Gro works not just on roses but subdivisions too.

What is going on in the American psyche that people buy dream homes but the art they buy to represent the value of their home bears no relation to the reality of their home in fact? Does anyone know where anything is, the conundrum seems to ask.

It took me ten years and the subprime mortgage crisis to understand the answer: no one knows where anything is because, really, no one does know where anything is.

Kincaid’s homes are Christian suffused new urbansim. But new urbanism was nowhere in sight among Kincaid’s audience in Wellington. Platted subdivisions are.

Across the United States, Americans are living in places where no one knows where anything is, in part because places and homes have been made into commodities, and in part, because familiarity with sameness leads nowhere.
This is what the market wants, according to the National Association of Homebuilders and the real estate lobby. But that’s a fallacy.

The particulars of suburban sprawl, the zoning codes, the cul de sacs and production homes look interchangeable as they do and exist with minor variations in the real estate section of every single local newspaper in America because homogeneity fits the financial models required by the big investment banks that package pools of mortgages, then slice, dice, and re-arrange the mortgages—while taking hefty commissions—making newly created credit a better deal for investors than it really is.

Who are these investors? No one knows. Is the landscape we live in, meant to serve foreign governments, or wealthy investors, or pension funds or insurance companies’ tolerance for risk?

Does anyone know where anything is?

Here’s the part that is the new epiphany: the financial press is as bewildered as anyone else about the phenomenon now called the “subprime mortgage meltdown”.

You can just picture, as easily as I, that too many people bought into the housing bubble—and that many of these people are middle and upper-middle and even rich Americans for whom real property was confused with speculation.

So it’s not a subprime mortgage crisis. That much is clear.

But the nature of the credit crisis is hard to grasp precisely because no one knows who owns the debt on the secondary market for residential mortgage backed securities, CDO’s, and other financial derivatives with names that could mean anything.

Today, we are hearing words of reassurance from the titans of Wall Street. This, too, shall pass.

To me, the Wall Street titans seem like synchronized swimmers, the dancers you see in the swimming pool in the Summer Olympics: heads all moving in unison, arms lifting out of the water with the grace of birds while underneath their legs churn like madmen.

So far it’s an impressive performance, depending on your point of view.

ALAN FARAGO writes about the environment and politics. He can be reached at


Alan Farago is president of Friends of the Everglades and can be reached at