Housing and Economic Recovery Act of 2008

Definition

The Housing and Economic Recovery Act of 2008 (HERA) was legislation enacted to address critical issues arising from the subprime mortgage crisis. It aimed to stabilize the housing market and help homeowners, particularly those facing foreclosure. One of the major components of HERA was the establishment of a new regulatory body, the Federal Housing Finance Agency (FHFA), to oversee the housing-related Government-Sponsored Enterprises (GSEs), including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBanks). FHFA was granted enhanced powers to set standards, limit asset growth, enforce regulations, and put entities into receivership when necessary.

Examples

Regulation of GSEs: Under HERA, the FHFA was formed by merging two previous agencies, the Office of Federal Housing Oversight (OFHEO) and the Federal Housing Finance Board (FHFB), and given the authority to regulate housing-related GSEs like Fannie Mae and Freddie Mac.
Capital Support: The act authorized the FHFA to provide capital infusions to struggling GSEs, like Fannie Mae and Freddie Mac, to prevent their failure and ensure they could continue to uphold their financial obligations. This provision was crucial in restoring confidence in housing finance.
Housing Assistance Programs: HERA included measures to assist homeowners facing foreclosure, such as enabling the Federal Housing Administration (FHA) to guarantee refinanced mortgages for borrowers who were at risk of default, thus making them more affordable.

Frequently Asked Questions (FAQs)

What was the primary purpose of the Housing and Economic Recovery Act of 2008?

The primary purpose of HERA was to address the subprime mortgage crisis by stabilizing the housing market, helping homeowners facing foreclosure, and reforming the oversight and functioning of housing-related GSEs.

What does FHFA stand for?

FHFA stands for the Federal Housing Finance Agency, which was created under HERA by merging the Office of Federal Housing Oversight and the Federal Housing Finance Board. It regulates housing-related GSEs such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

How did HERA affect Fannie Mae and Freddie Mac?

Under HERA, the FHFA was given the authority to provide financial support to Fannie Mae and Freddie Mac, ensuring their stability in times of financial distress. This move was aimed at restoring confidence in the housing finance system.

Did HERA offer any direct assistance to homeowners?

Yes. HERA included provisions to assist homeowners facing foreclosure by allowing the FHA to guarantee refinanced mortgages, making them more affordable and helping borrowers avoid losing their homes.

How does HERA impact the housing market?

HERA introduced regulatory reforms and financial mechanisms to stabilize the housing market, prevent further foreclosures, and restore faith in the housing finance system by ensuring the solvency of key GSEs.

Government-Sponsored Enterprises (GSEs)

Definition: Financial services corporations created by Congress to enhance the flow of credit to specific sectors of the American economy. Examples include Fannie Mae and Freddie Mac.

Fannie Mae (Federal National Mortgage Association)

Definition: A GSE that provides liquidity to the mortgage market by buying mortgages from banks and other depository institutions, thus enabling them to issue more loans.

Freddie Mac (Federal Home Loan Mortgage Corporation)

Definition: A GSE that purchases mortgages from smaller banks, often referred to as “thrifts,” to ensure they have the funds necessary to make additional mortgage loans.

Federal Home Loan Banks (FHLBanks)

Definition: A system of regional banks established to support mortgage lending and community investment, consisting of 11 member banks that provide reliable liquidity to their members.

Subprime Mortgage Crisis

Definition: A nationwide financial crisis, which occurred between 2007 and 2010, resulting from a dramatic rise in mortgage delinquencies and foreclosures due to borrowers defaulting on subprime home loans.

Online Resources

References

“The Housing and Economic Recovery Act of 2008.” Office of Federal Housing Enterprise Oversight (OFHEO).
Gramlich, Edward. “Subprime Mortgages: America’s Latest Boom and Bust.” Urban Institute Press, 2007.

Suggested Books for Further Studies

Gramlich, Edward. “Subprime Mortgages: America’s Latest Boom and Bust.” Urban Institute Press, 2007.
Muhlenkamp, Joseph L. “The Housing Boom and Bust in the 2000s.” Cambridge University Press, 2016.
Eggert, Kurt. “Mortgage Market Turmoil: Causes and Consequences.” American Bar Association, 2008.

Real Estate Basics: Housing and Economic Recovery Act of 2008 Fundamentals Quiz

### What key organization was created by making the Housing and Economic Recovery Act of 2008? - [ ] Federal Housing Authority (FHA) - [ ] Consumer Financial Protection Bureau (CFPB) - [x] Federal Housing Finance Agency (FHFA) - [ ] Office of the Comptroller of the Currency (OCC) > **Explanation:** The Housing and Economic Recovery Act of 2008 created the Federal Housing Finance Agency (FHFA) to oversee and regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. ### What was one primary reason for the creation of HERA in 2008? - [ ] To lower interest rates on all loans - [x] To address the subprime mortgage crisis - [ ] To fund new public housing projects - [ ] To provide loans for small businesses > **Explanation:** One of the primary reasons for the creation of the Housing and Economic Recovery Act (HERA) in 2008 was to address issues arising from the subprime mortgage crisis. ### Which organizations came under the jurisdiction of the new FHFA created by HERA? - [ ] Mortgage Bankers Association and the Federal Reserve - [ ] Small Business Administration (SBA) and credit unions - [x] Fannie Mae, Freddie Mac, and Federal Home Loan Banks - [ ] Securities and Exchange Commission (SEC) and FHLBanks > **Explanation:** The Federal Housing Finance Agency (FHFA) was established to regulate and oversee the activities of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. ### Does HERA allow the FHA to guarantee refinanced mortgages to help homeowners at risk of foreclosure? - [x] Yes, the FHA can guarantee refinanced mortgages under HERA. - [ ] No, this provision is not part of HERA. - [ ] Only for new property purchases - [ ] Only if the homeowner is building a new home > **Explanation:** HERA included provisions enabling the FHA to guarantee refinanced mortgages for borrowers at risk of foreclosure, helping them secure more affordable loans. ### What did the Housing and Economic Recovery Act of 2008 primarily aim to prevent? - [ ] High inflation rates - [x] Further foreclosures due to the subprime crisis - [ ] The development of luxury housing - [ ] The fall of real estate prices > **Explanation:** The primary aim of HERA was to prevent further foreclosures due to the subprime mortgage crisis, stabilizing the housing market and protecting homeowners. ### What statutory authority does FHFA hold over Fannie Mae and Freddie Mac under HERA? - [ ] Issue stock on their behalf - [ ] Operate all their banking branches - [x] Provide financial support and put entities into receivership - [ ] Manage their insurance policies > **Explanation:** Under HERA, the FHFA has statutory authority to provide financial support to Fannie Mae and Freddie Mac and, if necessary, to place these entities into receivership to ensure their continued operation and stability. ### How did HERA affect the mission of the Federal Home Loan Banks? - [ ] It dissolved the network of Federal Home Loan Banks. - [ ] It stopped them from issuing any new mortgages. - [x] It kept the focus on providing liquidity to support mortgage lending and community investment. - [ ] It shifted focus to commercial real estate investment. > **Explanation:** HERA retained the core mission of the Federal Home Loan Banks, focusing on providing liquidity to their members for mortgage lending and community investment. ### What types of loans did HERA directly impact? - [ ] Personal installment loans - [ ] Credit card debt - [x] Home loans and mortgages - [ ] Auto loans > **Explanation:** HERA directly impacted home loans and mortgages, providing mechanisms to stabilize the mortgage market and assist homeowners in distress. ### Under HERA, what is one method used by the FHA to help prevent foreclosure? - [ ] Increasing loan interest rates - [x] Guaranteeing refinanced mortgages - [ ] Issuing new credit cards - [ ] Refusing loans to high-risk borrowers > **Explanation:** HERA enabled the FHA to help prevent foreclosure by guaranteeing refinanced mortgages, making them more affordable and helping at-risk homeowners. ### What effect did HERA have on the confidence in the mortgage market? - [ ] It decreased confidence significantly. - [ ] It made no difference. - [x] It increased confidence due to government intervention and support for GSEs. - [ ] It completely eliminated the mortgage market. > **Explanation:** HERA increased confidence in the mortgage market by providing a means for government intervention and support for key GSEs like Fannie Mae and Freddie Mac, thus stabilizing the housing finance system.