14. Garn St-Germain Act
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What is the Garn-St.Germain Act of 1982 and how did it birth a great tool for real estate investors? In this episode, We’ll talk about some history and how you can use the tools given to you by this piece of legislation.
In 1982 congress passed this act which deregulated saving and loan institutions. Interest rates were being raised by the Federal Reserve Bank in an effort to combat inflation. As a result, people moved their money from banks to money market mutual funds which were yielding higher interest rates than banks could offer. Banks now had a problem since they were paying more for their deposits than they were earning on interest from the mortgages they had lent. They were also losing deposits and becoming illiquid; unable to originate new mortgages.
You see, before 1982 there was no such thing as an adjustable rate mortgage. If you as a homeowner got a mortgage with a low interest rate then rising inflation actually benefits you. You’re locked in at a low interest rate and that money you pay to the bank in interest is worth less and less as time goes on and inflation goes up. If you’re a bank then you really have a problem on your hands.
The St.Germain act enabled the creation of the Adjustable Rate Mortgage. This is a mortgage that has a fixed interest rate for a certain length of time, then its rate adjusts at a certain frequency for the remaining life of the loan. The bank is hoping they’ll get to raise the interest rate on you when the initial term is up. This is great for the bank because now they have a hedge in case we hit tough times and inflation goes on the rise.
Being able to offer Adjustable Rate Mortgages was great for the banks. But what did us little people get out of this piece of legislation? It’s something important in regards to your asset protection plan. First, let’s talk about a provision in your mortgage called the Due-on-sale clause.
The Saint-Germain act allowed property owners to transfer title of their property into an inter-vivos trust without triggering the due-on-sale clause of their mortgage. However, the property has to be less than 5 units, the borrower has to remain the beneficiary, and the trust must be revocable. An inter-vivos trust is simply a trust that’s created during the lifetime of the person creating the trust. There are many different variations of inter-vivos trusts out there. You’ve probably heard of a living trust. You may have even heard of a land trust if you’ve been in real estate long enough.
This allowed property owners to transfer title into a trust vehicle that will assist in the transfer of assets to their heirs or mask the true owner of the property from public records without the bank interfering. Pretty cool, right? After all, if you own lots of assets you probably don’t want the general public knowing about them.
The due-on-sale clause in your trust deed or promissory note says that if you sell or transfer ownership of the property, the bank can call the loan due. As in, pay all the money you owe now or else. You may see some chatter among investors about whether or not they should transfer their property into an LLC or leave it be. They may be hesitant to take this step since if the bank finds out, they could call the loan due. How often does this actually happen? I don’t really know. But if I was a bank and the going interest rates were dropping, I’d just be happy someone was paying the mortgage. However, if interest rates were going up I’d want to call the loan due and force the property owner to either refinance at a higher rate or give me my capital back so I could lend it out at higher rates.
So, if you own property in your own name, consider putting it into a trust. Or, if you’re hunting for lenders that will let you take title to a property in a trust and they say no- just remember that once you close that loan, they can’t do anything if you put it into a trust.