Housing and Economic Recovery Act of 2008

Definition

The Housing and Economic Recovery Act of 2008 (HERA) is a significant piece of legislation enacted by the United States Congress in response to the subprime mortgage crisis. The Act aimed to restore confidence in the housing market, support homeowners and stabilize financial institutions affected by the crisis. HERA established the Federal Housing Finance Agency (FHFA) as the new regulator for key housing-related Government-Sponsored Enterprises (GSEs), including the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System.

Key Provisions

1. Creation of the FHFA: HERA merged the Office of Federal Housing Oversight (OFHEO) and the Federal Housing Finance Board (FHFB) to form the Federal Housing Finance Agency (FHFA), endowing it with increased regulatory authority.
2. Enhanced Regulatory Powers: The FHFA was authorized to establish standards, restrict asset growth, and enforce actions, including placing GSEs into conservatorship or receivership if necessary.
3. Support for Homeowners:
   • Hope for Homeowners Program: Provided a mechanism for certain troubled borrowers to refinance into more manageable, government-insured mortgages.
   • Tax Credits: Provided first-time homebuyer tax credits to stimulate housing demand.
4. Neighborhood Stabilization Program: Allocated funds to state and local governments to purchase and rehabilitate foreclosed homes.
5. Modernization of FHA: Expanded the Federal Housing Administration’s (FHA) capacity to insure mortgages and stabilize the housing market.

Examples

1. Fannie Mae and Freddie Mac: The two largest GSEs, Fannie Mae and Freddie Mac, were placed under FHFA conservatorship in September 2008. This was a direct application of HERA’s provisions designed to stabilize and preserve the integrity of these institutions.
2. Neighborhood Rehabilitation: Under the Neighborhood Stabilization Program, cities like Detroit received federal funding to buy and refurbish foreclosed properties, helping to mitigate neighborhood decline due to high foreclosure rates.
3. Tax Incentives: Many first-time homebuyers benefited from a tax credit program created by HERA, which provided financial incentives to stimulate home purchases and support the housing market.

Frequently Asked Questions

What triggered the creation of the Housing and Economic Recovery Act of 2008?

The Act was passed in response to the subprime mortgage crisis, which caused widespread financial instability and a collapse in the housing market. The legislation aimed to restore confidence and provide a framework for stabilizing affected financial institutions and supporting homeowners.

What powers does the FHFA have under HERA?

The FHFA holds enhanced regulatory powers, including setting standards, restricting asset growth, enforcing compliance, and placing housing-related GSEs like Fannie Mae and Freddie Mac into conservatorship or receivership if deemed necessary.

How did the Act support homeowners during the crisis?

HERA included programs like Hope for Homeowners, offering a new refinancing option for troubled borrowers, and provided tax credits for first-time homebuyers to stimulate housing demand.

What role did the Neighborhood Stabilization Program play?

The Neighborhood Stabilization Program allocated funds to state and local governments to purchase and rehabilitate foreclosed homes, aiming to mitigate the impact of high foreclosure rates and neighborhood decline.

Related Terms

1. Subprime Mortgage Crisis: A financial crisis originating in the U.S. housing market due to a high default rate on subprime mortgages issued to borrowers with poor credit histories.
2. Government-Sponsored Enterprises (GSEs): Financial services corporations created by the U.S. Congress to enhance the flow of credit to specific sectors of the American economy, particularly the housing market.
3. Conservatorship: A legal concept where an entity or organization is placed under the control of a conservator by a regulatory authority, typically due to financial instability.
4. Mortgage-Backed Securities (MBS): Financial instruments secured by a collection of mortgages, sold to investors to transfer mortgage credit risk.

Online Resources

• Federal Housing Finance Agency (FHFA) Official Site
• Department of Housing and Urban Development (HUD) - Neighborhood Stabilization Program
• IRS Tax Benefits for Homeowners

Suggested Books for Further Studies

1. “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It” by Robert J. Shiller
2. “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again” by Atif Mian and Amir Sufi
3. “Fault Lines: How Hidden Fractures Still Threaten the World Economy” by Raghuram G. Rajan

Fundamentals of the Housing and Economic Recovery Act of 2008: Economics Basics Quiz

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