How did the Garn-St. Germain act matter?

Campbell and Hercowitz, which I found from a Krugman link, write:

The Monetary Control and the Garn-St.Germain Acts of 1980 and 1982 allowed market innovations that dramatically reduced these equity requirements: Greater access to sub-prime mortgages, mortgage refinancing, and home equity loans, reduced effective down payments and increased effective repayment periods. More important for the short run, it enabled households to cash-out previously accumulated home equity, which in 1982 amounted to 71 percent of GDP. This was followed by a huge wave of household borrowing.

Maybe I’ll deal with the 1980 Act another time. but on Garn-St. Germain those claims are not easy for me to verify.  (Their paper is a theory paper and offers no further evidence or narrative.  Here is also an earlier Krugman piece of relevance.

Here is one summary of what the Garn-St. Germain Act did.  Maybe this summary is incomplete but it is hard to see how Garn-St. Germain is responsible for either the current crisis or for the more general decline in national savings rates.  The closest I come to finding a relevant passage is:

(7) the act preempted state restrictions on enforcement by lenders of
due-on-sale clauses in most mortgages for a three year period ending
October 15, 1985, and authorized state chartered lenders to offer the
same kinds of alternative mortgages permitted nationally chartered
financial institutions.

Over time most institutions moved away from the state charter and those mortgages already were legal at the national level. 

Or try this summary of the Act, from a book.  Again, the connection is hard to see.  In fact Garn-St. Germain freed up S&Ls from investing so much in home mortgages.  You can blame that (partially) for the S&L crisis, but the current real estate bubble?  Or the general rise in indebtedness which started in the 1980s?

Here’s a recent empirical paper on the rise in U.S. household indebtedness.  Not surprisingly, it emphasizes demographic factors as the main causes.  pp.18-19 discuss financial innovation as a contributing cause but there is not a peep about Garn-St. Germain.  The authors do cite a paper by Wendy Edelberg, who pinpoints some of these innovations as coming in the mid-1990s and resulting from greater risk-based pricing of loans.

On mortgages, a lot of the relevant deregulation occurred at the state level or the problem was the simple lack of enforcement of anti-fraud laws.  Government-promoted low or zero down payment mortgages date back at least to Section 235 of HUD, from 1968 (a disaster, by the way) and Garn-St. Germain is hardly a turning point in that history.

Maybe I’m wrong about Garn-St. Germain.  If so, I’d like to learn how and I am asking you, readers, to set me straight. 


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