What Is the Housing and Economic Recovery Act (HERA)?

What Is the Housing and Economic Recovery Act (HERA)?

Let me tell you directly: The Housing and Economic Recovery Act (HERA) was created to handle the mess from the 2008 subprime mortgage crisis. It let the Federal Housing Administration (FHA) guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers. If you're a lender wanting in on this, you had to write down the principal loan balances to no more than 90% of the current appraised value.

Key Takeaways

Here's what you need to know without fluff: HERA of 2008 was Congress's financial reform response to the subprime crisis. It authorized the FHA to back $300 billion in those new fixed-rate mortgages for subprime folks. The act bundles several sub-statutes, like the Housing Assistance Tax Act, the FHA Modernization Act, and the Secure and Fair Enforcement for Mortgage Licensing Act. Plus, it set minimum down payment standards for FHA loans.

Understanding the Housing and Economic Recovery Act (HERA)

At its core, HERA aimed to rebuild trust in government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac that handle home loans. It gave states the ability to refinance subprime loans using mortgage revenue bonds and set up the Federal Housing Finance Agency (FHFA). As a new entity, the FHFA stepped in to place Fannie Mae and Freddie Mac under conservatorship right in 2008.

HERA also packed in subtitle acts, which I'll outline: the Housing Assistance Tax Act of 2008, the FHA Modernization Act of 2008, and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.

Remember, the conservatorship for Fannie Mae and Freddie Mac was about avoiding more taxpayer bailouts, keeping mortgage credit available for affordable housing, and strengthening the secondary mortgage market.

Housing Assistance Tax Act of 2008

This part of HERA provided a refundable tax credit for qualified first-time homebuyers on purchases from April 9, 2008, to before July 1, 2009. It was 10% of the purchase price for a principal residence, capped at $7,500, but cut off for those earning over $75,000 individually or $150,000 jointly.

If you got the credit, you had to repay it over 15 years in equal chunks added to your annual income taxes. It also threw in emergency aid for redeveloping abandoned and foreclosed homes.

FHA Modernization Act of 2008

This subtitle bumped up the FHA loan limit from 95% to 115% of the area median home price, going as high as 150% of the GSE conforming loan limit. It required a 3.5% down payment for all FHA loans and put a 12-month hold on HUD's risk-based premiums.

It banned seller-funded down payments but allowed the FHA to insure up to $300 billion in 30-year fixed-rate refinance loans up to 90% of appraised value for borrowers in trouble. This covered mortgage commitments before January 1, 2008.

Existing mortgage holders had to take the insured loan proceeds as full payment for prior debts, and lender involvement was optional. Note that FHA loans might demand a 10% down payment if your credit score is under 580.

Secure and Fair Enforcement for Mortgage Licensing Act of 2008

This section made states implement a licensing and registration system for mortgage loan originators (MLOs) by August 1, 2009—or 2010 for biennial legislatures. States could run their own setups under federal standards or join the Nationwide Multistate Licensing System and Registry (NMLS).

Be aware: Mortgage lending discrimination is illegal. If you face it based on race, religion, sex, marital status, public assistance use, national origin, disability, or age, report it to the Consumer Financial Protection Bureau (CFPB) or HUD.

What Did the Housing and Economic Recovery Act (HERA) Do?

HERA tackled key flaws in the mortgage industry after the 2008 crisis and housing bust. Its goal is to stop predatory lending and avoid another similar disaster.

Who Created HERA?

Congress passed HERA to aid mortgage industry recovery and boost confidence in Fannie Mae and Freddie Mac. President George W. Bush signed it into law.

What Agencies Does the Federal Housing Finance Agency (FHFA) Regulate?

HERA created the FHFA as an executive regulatory body. It oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.

What Is Title V of HERA?

Title V sets national standards for licensing and registering mortgage loan originators, ensuring you deal with trustworthy professionals when getting a mortgage.

The Bottom Line

HERA exists to foster a stable housing market for you as a borrower, lender, or investor. If you're a homeowner or planning to buy, HERA impacts you by guarding against predatory practices, so you can proceed confidently without dreading a 2008 repeat.