The Housing and Economic Recovery Act (HERA) was enacted by Congress in 2008 in response to financial challenges in the housing sector. It enabled the Federal Housing Administration (FHA) to offer guarantees for new 30-year fixed-rate mortgages for certain borrowers. Additionally, HERA established minimum down payment standards for FHA loans, to promote responsible homeownership and stabilize the housing market.
The HERA was introduced to tackle the aftermath of the 2008 subprime mortgage crisis. It allowed the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers while requiring lenders to reduce loan balances to 90% of their current appraised value to participate in the program. The main objective of HERA was to address significant issues in the mortgage lending industry after the 2008 financial crisis and housing collapse and to prevent future crises by addressing problems like predatory lending.
HERA and GSEs
The HERA aimed to restore trust in government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, who provided home loans. It allowed states to refinance subprime loans through mortgage revenue bonds and established the Federal Housing Finance Agency (FHFA) to oversee these GSEs. The FHFA assumed control of Fannie Mae and Freddie Mac, placing them under conservatorship in 2008.
HERA also included several subtitle acts:
- FHA Modernization Act of 2008
- Secure and Fair Enforcement for Mortgage Licensing Act of 2008
- Housing Assistance Tax Act of 2008
The primary objectives of the Fannie Mae/Freddie Mac conservatorship were to prevent the need for taxpayer bailouts, ensure mortgage credit availability for affordable housing, and maintain a robust secondary mortgage market.
FHA Modernization Act
The HERA brought significant changes to FHA loans. It increased the FHA loan limit, mandated a 3.5% down payment, and halted risk-based premiums for 12 months. The act also prohibited seller-funded down payments and allowed the FHA to insure up to $300 billion in 30-year fixed-rate refinance loans for distressed borrowers. Existing mortgage holders were required to accept the proceeds of the insured loan as full payment for a preexisting debt. Additionally, FHA loans might require a higher down payment of 10% for borrowers with credit scores below 580.
Secure and Fair Enforcement for Mortgage Licensing Act
The act mandated all states to establish a mortgage loan originator (MLO) licensing and registration system, either independently following federal standards or by joining a multistate registry. It also emphasized the illegality of mortgage lending discrimination and provided options for reporting such incidents to the Consumer Financial Protection Bureau (CFPB) or HUD.
HERA’s Title V
The purpose of Title V of the HERA is to ensure that homebuyers are working with dependable originators and lenders when obtaining mortgage loans, through the enforcement of nationwide standards for licensing and registration of mortgage loan originators.
The primary goal of the Housing and Economic Recovery Act is to establish a stable housing market for borrowers, lenders, and investors. Even if homeowners and potential buyers are not fully aware of it, the act impacts them. By protecting predatory lending and unfair practices, it ensures that Americans can purchase homes with confidence and without fear of another housing crisis like that of 2008.