The Housing and Economic Recovery Act (HERA) of 2008 was legislation enacted by Congress to address the catastrophic fallout from the subprime mortgage crisis, which severely impacted the American economy. HERA aimed not only to provide immediate relief to distressed borrowers but also to instill long-term reforms within the housing and financial markets.
Key Provisions of HERA
Federal Housing Administration (FHA) Guarantees
One of the crucial elements of HERA was its provision allowing the Federal Housing Administration (FHA) to guarantee up to $300 billion in new, 30-year fixed-rate mortgages specifically targeting subprime borrowers. Lenders were required to write down the principal balances of existing loans to 90% of their current appraised value to qualify for these guarantees.
Establishment of the Federal Housing Finance Agency (FHFA)
HERA established the Federal Housing Finance Agency (FHFA) to oversee and regulate the government's sponsored enterprises (GSEs), specifically Fannie Mae and Freddie Mac. This new agency’s authority extended to placing both Fannie Mae and Freddie Mac under conservatorship in 2008, thus preventing further taxpayer bailouts and ensuring the availability of mortgage credit for affordable housing.
Housing Assistance Tax Act
HERA included sub-parts that aimed to stimulate home buying. Among these, the Housing Assistance Tax Act of 2008 offered a refundable tax credit for first-time homebuyers equal to 10% of the purchase price (up to $7,500) for homes bought prior to July 1, 2009. This act also provided aid for the redevelopment of abandoned and foreclosed properties.
FHA Modernization Act
HERA's FHA Modernization Act of 2008 raised the FHA loan limit to 115% of the area’s median home prices, with a cap of 150% of the GSE conforming loan limit. It required a minimum 3.5% down payment for FHA loans and established strict standards regarding seller-funded down payments, which were deemed risky.
Secure and Fair Enforcement for Mortgage Licensing Act
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 mandated states to implement a system for licensing and registering mortgage loan originators by August 1, 2009. This was crucial in preventing mortgage lending discrimination and ensuring that homebuyers could trust their lenders.
Goals of HERA
HERA had several overarching objectives:
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Preventing Future Crises: The act aimed to address systemic risks within the mortgage lending industry that contributed to the 2008 financial crisis, specifically focusing on predatory lending practices.
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Restoring Confidence: By facilitating the recapitalization of Fannie Mae and Freddie Mac and enhancing oversight through the FHFA, HERA sought to restore public faith in these essential institutions.
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Ensuring Access to Credit: HERA was designed to ensure that affordable mortgage credit remains accessible to consumers, allowing them to buy homes with more confidence and support.
Importance of HERA Today
The repercussions of HERA's provisions can still be felt in today’s housing market. Its regulations helped create a more robust framework for mortgage lending, placing emphasis on consumer protections and the regulation of financial practices. For potential homebuyers, the protections established under HERA mean that they are less likely to encounter the predatory lending practices that characterized the pre-crisis era.
Conclusion
The Housing and Economic Recovery Act (HERA) of 2008 represented a significant step in America's efforts to reform the housing finance system in the wake of the subprime mortgage crisis. With its comprehensive measures designed to stabilize the housing market, HERA continues to impact homebuyers, lenders, and investors alike, allowing for a more dependable and fair home-buying process. Whether you're an existing homeowner or a prospective buyer, HERA influences your experience in the real estate market today, promoting stability and confidence in homeownership.