Garn-St. Germain Depository Institutions Act

No Thanksgiving would be complete without sending up a big thanks to Congress for the Garn-St. Germain Act.  

What? You’ve never heard of Garn -St. Germain? Grab yourself a cup of coffee and settle into a comfortable chair. This is one story you want to hear.

Why Did The Garn-St. Germain Depository Institutions Act get Passed?

It starts back in 1982 with a seemingly-innocent little paragraph known as the “due-on-sale clause.” This landmine is buried in most mortgage agreements and provides that if the mortgaged house is sold, then the unpaid amount on the mortgage becomes immediately due and payable in full.  

That makes sense if the house is actually sold. The buyer pays the seller for the house, the seller pays off the mortgage encumbering the house, and everyone goes merrily down the road.

There are, however, times when the ownership of a house changes yet no money actually changes hands. Two common examples are when the owner dies and the house title transfers as part of the owners’ estate, and when the owner creates a living trust and transfers the house title into the trust.

If no money is paid for the transfer, then there are usually not enough liquid funds to pay off the mortgage. Thus, if the mortgage lender invokes the due-on-sale clause, most likely the house will be foreclosed upon. As a result, before 1982 when owners died their residences were going back to the banks at an alarming clip. Likewise, owners were unable to engage in estate planning or asset management because they could not transfer their house into a living trust without the bank foreclosing.

So what happened in 1982? Let’s set the scene. Things were looking bad for the housing industry. Lenders were going out of business, home mortgages were not easily available, and the whole residential real estate market was rocking to a standstill. To counter-act that, Congress passed the Garn-St. Germain Depository Institutions Act.

What Is The Garn-St. Germain Depository Institutions Act?

A big part of the Act was to slow down foreclosures by making it illegal for a lender to exercise the due-on-sale clause for certain types of real property in certain situations. The real property covered included residential real property containing less than 5 dwelling units (think single residence, townhouses and some condos) and residential manufactured homes. 

Lenders were forbidden to exercise due-on-sale clauses for a number of situations where it would be, frankly, unfair.   

For example, sometimes a home owner secures a loan for home construction that is collateralized by a 2nd lien on the home.  It would be very unfair if the original lender declared the original mortage in default.

A lot of homes pass to relatives when the original owner dies. Under Garn-St. Germain, the lender cannot use that to accelerate the original mortgage. The lender is also forbidden to accelerate when the borrower transfers the house of his or her spouse or children, when the borrower divorces and his or her spouse became the owner of the property, and when the house is transferred into an inter vivos (living) trust where the borrower was a beneficiary of the trust.

Of course, in none of these situations is the mortgage just wiped out. The mortgage goes along with the house and becomes the obligation of the new owner.

Garn-St Germain is one of the most consumer-friendly laws that has ever been passed.  Thanks, Congress.

Virginia Hammerle is a Texas attorney whose practice includes estate planningguardianship and probate. Sign up for her newsletter at Contact Hammerle Finley Law Firm to schedule a consultation at