Housing and Economic Recovery Act of 2008

The Housing and Economic Recovery Act of 2008 was legislation passed to address the subprime housing crisis by creating a new regulator for housing-related Government-Sponsored Enterprises (GSEs) and granting enhanced powers to enforce standards and restrictions on these entities.

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.

  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

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

### What year was the Housing and Economic Recovery Act enacted? - [ ] 2007 - [x] 2008 - [ ] 2009 - [ ] 2010 > **Explanation:** The Housing and Economic Recovery Act was enacted in 2008 in response to the subprime mortgage crisis. ### Which agency was created as part of the Housing and Economic Recovery Act of 2008? - [ ] FHFA (Federal Housing Finance Agency) - [ ] FHA (Federal Housing Administration) - [x] FHFA (Federal Housing Finance Agency) - [ ] HUD (Department of Housing and Urban Development) > **Explanation:** The Federal Housing Finance Agency (FHFA) was created by the Housing and Economic Recovery Act of 2008 to regulate housing-related GSEs like Fannie Mae and Freddie Mac. ### Which housing-related GSEs are regulated by the FHFA under HERA? - [x] Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System - [ ] Fannie Mae, HUD, and the FHA - [ ] Freddie Mac, HUD, and the VA - [ ] The Federal Reserve, Fannie Mae, and Freddie Mac > **Explanation:** The FHFA regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System under the Housing and Economic Recovery Act of 2008. ### What is the purpose of the Neighborhood Stabilization Program? - [ ] To provide tax refunds to first-time homebuyers - [ ] To offer mortgage insurance - [x] To allocate funds to state and local governments for purchasing and rehabilitating foreclosed homes - [ ] To provide refinancing options for troubled borrowers > **Explanation:** The Neighborhood Stabilization Program allocated funds to state and local governments for purchasing and rehabilitating foreclosed homes to combat neighborhood decline. ### What type of new opportunities did HERA provide for homeowners? - [ ] Investment options in real estate - [x] Refinancing options via the Hope for Homeowners Program - [ ] New mortgage backing guidelines by private investors - [ ] Increased property tax incentives > **Explanation:** HERA provided refinancing options for troubled borrowers through the Hope for Homeowners Program, to help them secure more manageable, government-insured mortgages. ### Which crisis prompted the Housing and Economic Recovery Act of 2008? - [ ] The Dot-com Bubble - [x] The Subprime Mortgage Crisis - [ ] The European Debt Crisis - [ ] The Great Depression > **Explanation:** The Subprime Mortgage Crisis, characterized by high default rates on subprime mortgages and subsequent financial instability, prompted the enactment of the Housing and Economic Recovery Act of 2008. ### What key power does the FHFA hold under HERA? - [ ] Setting mortgage interest rates - [ ] Issuing credit default swaps - [ ] Providing direct loans to homeowners - [x] Placing GSEs into conservatorship or receivership > **Explanation:** The FHFA holds the power to place housing-related GSEs into conservatorship or receivership, among other regulatory authorities, under HERA. ### In which area did HERA introduce tax credits to support the housing market? - [x] First-time homebuyers - [ ] Real estate investors - [ ] Commercial property owners - [ ] High-income households > **Explanation:** HERA introduced first-time homebuyer tax credits to stimulate housing demand and support the market. ### Which program provided a new refinancing option under HERA? - [ ] The Community Reinvestment Act - [ ] The Federal Housing Loans Program - [x] The Hope for Homeowners Program - [ ] The Freddie Mac Flexible Financing Plan > **Explanation:** The Hope for Homeowners Program under HERA provided refinancing options for troubled borrowers, ensuring more manageable mortgage terms. ### What significant merger formed the FHFA? - [ ] The merger of HUD and FHA - [ ] The merger of Fannie Mae and Freddie Mac - [x] The merger of the Office of Federal Housing Oversight (OFHEO) and the Federal Housing Finance Board (FHFB) - [ ] The merger of the Home Loan Bank Board and the FHA > **Explanation:** The FHFA was formed by merging the Office of Federal Housing Oversight (OFHEO) and the Federal Housing Finance Board (FHFB).

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