Not long ago, mortgage bankers sized up borrowers before making loans; lenders were a phone call away if home owners had trouble repaying. Not anymore. Investment banks engineered new mortgage instruments that gave larger loans on riskier terms to people with weaker credit. Banks pooled these new mortgages together, then split the pools into bonds with varying risk levels. The details were complex, but the results were magical: ﬁnancial engineering seemed to transform dodgy mortgages into safe bonds. So long as interest rates stayed low and house values high, everyone made money.
But not for long. Fragmenting mortgage ownership broke the link between borrower and lender. When rates rose and prices dropped, the gridlock features of the new ﬁnancial instruments came to the fore. There were so many partial owners of pooled mortgages that no one cared to act like an old-fashioned mortgage banker with careful underwriting and loan servicing. Until recently, foreclosure had been the banker’s last resort because it’s costly for everyone, including the lender. But in the new world of too many owners, widespread foreclosures became inevitable. Scattered owners of pooled mortgages could not easily reach agreement to restructure troubled loans. Today, there’s no one for a borrower to talk to at the other end of the phone.
There’s a regulatory gridlock story here as well. Mortgage regulation is still based on the old one-mortgage, one-banker model. (It’s the real estate analogue to the one-product, one-patent model that makes high-tech innovation so difﬁcult.) New ﬁnancial instruments fall between multiple federal and state regulators. No single agency can protect the integrity of the ﬁnancial system as a whole, but each is powerful enough to block the others from stepping on its bureaucratic turf. Regulatory gridlock meant that no one checked as hundreds of billions in dangerous mortgage bonds were created and sold.
By the time you read this, the mortgage crisis may have been sorted out. My point is not to focus on yesterday’s story but to say that what is in the news often has a surprising gridlock angle. Too many owners mean too little prosperity.
In the following chapters, I’ll take you on a tour of gridlock battlegrounds—from medieval robber barons to modern broadcast spectrum squatters; from Mississippi courts selling African-American family farms to troubling New York City land conﬁscations; and from Chesapeake Bay oyster pirates to today’s gene patent and music mash-up outlaws. Each tale offers insights into how to spot gridlock in operation and how to overcome it.
This book is for anyone who wants to assemble resources for positive change, get a jump on next-generation innovation, or simply understand the hidden workings of everyday life. Nothing is inevitable about gridlock. Every example results from choices we make, and can change, about how to control the resources we value most. We can unlock the grid once we know where to start.