Depository Institutions Act of 1982

By Phineas Upham

Signing Ceremony for H.R. 6267

One of the more controversial aspects of the recent financial collapse was the role of adjustable-rate mortgages. Right or wrong, these mortgages can trace themselves back to the year 1982. The housing industry was facing a slump at the time, so congress was exploring methods to try and give home ownership a shot in the arm.

They devised the Garn-StGermain Depository Institutions Act of 1982, which was enacted in October of that year. The act deregulated savings and loan banks, and it gave lenders the opportunity to offer an adjustable-rate mortgage. There are times when an ARM loan can be beneficial, such as when you’re transitioning from one part of the country to another and need to sell your home. Unfortunately, ARM loans are also easily exploited because they offer attractive rates up front.

These loans have a fixed rate for a certain period of time, say three years, then they have an adjustable rate for the remaining years of the loan. This works out well for lenders, because they can use variable rates that match where the market is, and it did do the job of making mortgage loans available to the general public. It is also viewed as one of the circumstances that contributed to the financial collapse of that decade.

However, the Depository Institutions Act allowed for another important consumer change that many take advantage of today. Owners could place a home into a trust, without triggering a “due-on sale clause.” This protected the home owner from being responsible for the full amount of the loan if he or she wanted to pass that home onto heirs.

Phineas Upham is an investor from NYC and SF. You may contact Phin on his Phineas Upham website or Facebook page.