Garn-St. Germain Depository Institutions Act
Candlefocus EditorThe purpose of the Act was to alleviate the financial pressure and combat inflation in the country. Its regulations eased the changes brought forward by the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980. The most significant effect of the legislation was the creation of a new class of loans – adjustable-rate mortgages (ARMs).
Title VIII of this Act allowed banks and savings and loan, that are government-supervised, to offer different types of mortgage loans. This change gave banks the freedom to offer modern financial contracts which had more flexibility and faced less regulatory scrutiny. ARMs – now known as “Options ARMs” – let borrowers decide the rate of interest and the composition of the repayments ( between the principal and the interest rate). This Act also permitted the securitization of debt, where groups of ARMs were packaged and sold as bonds.
With these changes, borrowers suddenly had access to loans with attractive conditions, such as decreased down payment and deviating repayment amounts, making mortgages available to population segments that had no access to them before.
Also included in the Garn-St. Germain Depository Institutions Act was a provision that allowed failing banks to spin off their bad assets and close, possibly without the need to use taxpayer funds to bail them out, which was a common occurrence prior to the 1980s. This was achieved by establishing a new type of holding companies with the purpose of buying the mortgages that were established by the Act with the intention of buying problem loans and liquidating them in a more systematic way.
Considering all these changes, the Garn-St. Germain Depository Institutions Act of 1982 revolutionized the banking industry. It provided lenders with more freedom, created a system of securitization of mortgages and allowed banks to spin off their bad assets, leaving the market looking for buyers for those assets in the secondary market, setting the stage for the US and world economy for many decades to come.