How Wall Street, Ronald Reagan, and Congress created a financial time bomb.

This is an exclusive, adapted excerpt from Our Lot: How Real Estate Came to Own Us, published this week by Bloomsbury.

The Obama administration's new financial industry reform plan may be the beginning of banking's biggest overhaul since the Great Depression. But one of the most remarkable things is that it leaves untouched one of the main causes of the financial meltdown: the business of packaging and trading of securities made up of thousands of pureed mortgages.

Indeed, the Obama plan is designed to make that industry more efficient than ever. Imagine the credit markets are like traffic in a busy city; once the deadly pileup is cleared away regulators will be drawing lines on the street, setting up traffic signals at intersections, issuing tickets for moving violations-so that those who invest in mortgage-backed securities can be assured that they're getting the expected returns, and borrowers won't get stuck with loans they can't repay.

One might think that the mortgage-backed securities business has always been there as a backstop to the American dream, but in fact it's a very recent invention, dating back to the 1970s. And it only really took flight a decade later, when the same wave of deregulation that sparked the S&L crisis also made it possible for investment banks to make and market mortgage-backed securities on a massive scale. The Obama plan, it turns out, owes less to FDR than it does to Ronald Reagan.

In the mid 1970s, a team of traders at Salomon Brothers worked with Bank of America for three years, trying to create some kind of bond, made up of bunches of home mortgages, that they could convince large numbers of investors to buy. A former night mailroom clerk-turned-trader named Lewis Ranieri joined the project in 1977, as it neared fruition. They didn't even have a name for what they were doing, until a Wall Street Journal columnist asked them and Ranieri came up with "securitizing." That is, they were taking all these mortgages and turning them into a security, like a bond, that could be bought and sold among investors.

The first bonds found few buyers. Most states had laws forbidding pension funds and other institutional investors from buying securities that weren't registered with state officials. The Securities and Exchange Commission, too, required piles of documentation for each mortgage pool. The IRS was determined to tax the transactions. And even when Salomon figured out how to deal with the government's demands, few investors wanted to stick around for 30 years waiting to get paid as homeowners sedulously wrote their mortgage checks month after month. The hurdles to turning homes into readily tradable securities stretched out before Ranieri and his colleagues like a mountain chain.