Deregulation Act Essay

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Deregulation Act had following effects:- 1. Capital requirement was dropped from 5% to 3% by Federal Housing Loan Bank Board (FHLBB). 2. Banks were allowed to charge 6% origination fee. This fee was charged on any loan the made. 3. Barrier between banking and commerce was abolished (breaking of Glass –Steagall Act) 4. Loans were made on appraised value of the property rather than the purchase price of the property. 5. They were allowed 100% financing. 6. Deregulation led to the huge growth in savings and loans institutions as they were now making massive profits from real estate. Deposits in savings and loans institutions were insured by Federal Savings and Loans Insurance Corporations (FSLIC) because of which depositors continued to invest…show more content…
Germain Depositary Institution Act (first Tax Reform Act) was passed. Under this act savings and loans institutions were allowed to make loans to non-residential properties to raise the capital which were earlier done by the commercial banks. They were giving loans on the appraised value of the property. All this made thrifts to absorb money from all over the country because of high insurance deposits and high interest rates. Everybody was taking over there share. Tax rate was also interrupted from 72%to 28%. Now, when they started investing in money market which was a risky investment, they did not have money to cover the insurance funds. FSLIC was “ill equipped” as per the changed behavior of the thrifts. When FSLIC started to bail out in 1983, it costs FSLIC $20 billion but it had only $6 billion in reserve at that time which led to its bankruptcy. Then in 1985, oil prices fell and some people who invested their money in thrifts defaulted because it made their investments unprofitable. Between 1982 and 1985, the thrift industry expanded as the funds were flowing in this industry due to the shift to the financial market. During this time there was a decline in mortgage lending of savings and loans institutions from 78% to
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