Housing and Economic Recovery Act (HERA)

Key takeaways

• HERA (2008) was enacted to stabilize the housing market and respond to the subprime mortgage crisis.
• It created the Federal Housing Finance Agency (FHFA) and gave the FHA authority to guarantee large volumes of refinance loans for distressed borrowers.
• HERA contains multiple subtitle acts that (a) offered a temporary first-time homebuyer tax credit, (b) modernized FHA lending rules, and (c) established national standards for mortgage loan originator licensing (the SAFE Act).
• The law strengthened oversight of Fannie Mae, Freddie Mac and the secondary mortgage market and included measures to reduce predatory lending.

Overview

The Housing and Economic Recovery Act of 2008 was passed to restore confidence in mortgage finance after the housing collapse. Its goals were to shore up government-sponsored enterprises (GSEs), increase regulatory oversight, expand tools for refinancing distressed mortgages, and protect borrowers from unfair lending practices.

Major components

Federal Housing Finance Agency (FHFA)

HERA established the FHFA as the regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. The FHFA was given authority to supervise these entities and, in 2008, placed Fannie Mae and Freddie Mac into conservatorship to stabilize the secondary mortgage market and ensure continued mortgage credit availability.

FHA refinancing and guarantees

HERA authorized the Federal Housing Administration (FHA) to insure or guarantee large volumes of 30-year fixed-rate refinance loans for distressed borrowers—up to program limits intended to promote loan modification and prevent foreclosures. Participation by lenders was voluntary; the program included provisions allowing lenders to accept the proceeds of these insured loans as full payment of prior indebtedness and required certain write-downs to reflect current appraised values.

SAFE Act (Secure and Fair Enforcement for Mortgage Licensing)

Title V (the SAFE Act) required states to implement licensing and registration systems for mortgage loan originators (MLOs) to improve accountability and reduce fraud. States could run their own compliant systems or participate in the Nationwide Multistate Licensing System (NMLS). Compliance deadlines were set for 2009 (with a limited extension to 2010 for some legislatures).

Subtitle provisions

Housing Assistance Tax Act (first-time homebuyer credit)

HERA included a refundable tax credit for qualified first-time buyers who purchased a principal residence between April 9, 2008 and July 1, 2009. The credit equaled 10% of the purchase price up to $7,500 and phased out for higher-income taxpayers. The original provision anticipated repayment over 15 years as an annual surcharge on income taxes; the specific treatment depended on subsequent legislation and IRS rules applicable at the time.

FHA Modernization provisions

This subtitle adjusted FHA program parameters to expand access to refinance options for distressed borrowers: it raised FHA loan limit calculations in some circumstances, mandated a 3.5% minimum down payment for FHA loans, prohibited seller-funded down payments, and temporarily suspended HUD implementation of risk-based mortgage insurance premiums. It also allowed the FHA to insure substantial volumes of refinance loans for eligible borrowers—subject to participation terms and lender acceptance.

Consumer protections and enforcement

HERA sought to curb predatory lending practices and improve transparency in mortgage origination. The SAFE Act and other provisions increased licensing and oversight of originators, and the law reinforced that mortgage lending discrimination is illegal. Consumers suspecting discrimination can report violations to federal agencies such as the Consumer Financial Protection Bureau (CFPB) or the Department of Housing and Urban Development (HUD).

Practical implications

• Borrowers: HERA expanded refinancing options for homeowners in distress and set minimum standards (for example, FHA down payments) that continue to influence FHA lending policies. Borrowers with low credit scores may face higher down-payment requirements.
• Lenders and originators: Mortgage originators must be licensed and registered under national standards; lenders may participate in FHA refinance programs on voluntary terms and must follow FHA rules regarding down payments and insured loan terms.
• Market stability: The FHFA’s authority and the conservatorship of GSEs were designed to prevent systemic collapse and preserve the flow of mortgage credit.

Bottom line

HERA was a comprehensive response to the 2008 housing crisis that strengthened regulator authority, expanded FHA tools for refinancing distressed loans, introduced national licensing for mortgage originators, and provided temporary tax incentives for first-time buyers. Its lasting effects include the creation of the FHFA, enhanced oversight of mortgage markets, and rules that continue to shape FHA lending and consumer protections.