Public Law 110-28: The Housing and Economic Recovery Act

In response to the widespread financial instability of 2008, the United States Congress passed the Housing and Economic Recovery Act of 2008 (HERA). This legislation was a direct response to the escalating subprime mortgage crisis, which had weakened the nation’s housing market and threatened the broader economy. The act aimed to stabilize the housing sector, restore confidence in financial markets, and provide relief to struggling homeowners. Its purpose was to prevent a complete collapse of the housing finance system by addressing systemic risks, consumer protections, and direct assistance programs from multiple angles.

Creation of the Federal Housing Finance Agency

A component of HERA was the establishment of the Federal Housing Finance Agency (FHFA), an independent regulatory body created to oversee the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. These entities played a massive role in the U.S. mortgage market by purchasing mortgages from lenders, pooling them into securities, and selling them to investors, thereby providing essential liquidity to the market. The financial health of Fannie Mae and Freddie Mac was a matter of national concern because of their implicit government backing, which created a systemic risk to the entire financial system. Before HERA, these GSEs were supervised by the Office of Federal Housing Enterprise Oversight (OFHEO), an agency seen as lacking the authority to effectively regulate their increasingly complex activities.

The FHFA was granted the power to place Fannie Mae and Freddie Mac into conservatorship, a legal process where a regulator takes control of a troubled company to stabilize its operations and preserve its assets. This authority was a measure to prevent the outright failure of the GSEs, which would have had catastrophic consequences for mortgage credit availability. Shortly after HERA was enacted, the FHFA exercised this power in September 2008, placing both firms under its direct control. This action allowed the U.S. Treasury to inject capital to keep them solvent, ensuring the secondary mortgage market continued to function.

The HOPE for Homeowners Program

HERA introduced the HOPE for Homeowners (H4H) program, a voluntary initiative to help homeowners at risk of foreclosure refinance into more affordable, stable mortgages insured by the Federal Housing Administration (FHA). Running from October 2008 to September 2011, the program addressed defaults from unaffordable subprime loans. It offered a path for borrowers to move from complex, high-cost mortgages to traditional 30-year fixed-rate loans.

To be eligible, a borrower’s mortgage must have originated on or before January 1, 2008, and their mortgage debt-to-income ratio had to be greater than 31 percent. The property had to be the owner’s primary residence, and the borrower could not have intentionally defaulted on their loan.

The program required lenders to make significant concessions. For a borrower to refinance, the lender had to write down the principal balance to 90 percent of the home’s newly appraised value. In return for this principal reduction, the homeowner had to share 50 percent of any future appreciation in the property’s value with the government.

Despite its goals, the H4H program had a limited impact. Because the program was voluntary, lenders were often reluctant to participate since they had to accept significant losses. The process was also complex, requiring agreement from all lien holders, and the equity-sharing provision was a disincentive for some homeowners. The program assisted far fewer borrowers than its $300 billion in lending authority suggested.

First-Time Homebuyer Tax Credit

HERA created a tax credit for first-time homebuyers to stimulate the housing market. The original version for homes purchased in 2008 was structured as an interest-free loan, allowing buyers to claim up to 10% of the purchase price, capped at $7,500.

A feature of the 2008 credit was its repayment requirement. Taxpayers had to pay it back to the government over a 15-year period in equal, interest-free annual installments. This repayment was added to the taxpayer’s federal income tax liability, beginning with their 2010 tax return.

To qualify as a first-time homebuyer, an individual could not have owned a principal residence during the three-year period before the purchase. The credit was also subject to income limitations, phasing out for single individuals with an AGI above $75,000 and for married couples with an AGI above $150,000.

In 2009, the American Recovery and Reinvestment Act (ARRA) increased the credit to $8,000. For homes purchased in 2009, the repayment requirement was eliminated for buyers who remained in their home for at least 36 months. The expansion also included a credit of up to $6,500 for certain long-time residents buying a new primary residence.

Federal Housing Administration Modernization

HERA included provisions to modernize the Federal Housing Administration (FHA), a government agency that provides mortgage insurance on loans made by FHA-approved lenders. The changes allowed the FHA to play a more significant role in stabilizing the housing market as private mortgage financing contracted. As private lenders tightened underwriting standards and the market for non-GSE-backed mortgage securities collapsed, the FHA stepped in to fill the void. Its expanded capacity enabled it to provide a source of mortgage credit for first-time homebuyers and borrowers with less-than-perfect credit.

An impactful change was the increase in the FHA’s statutory loan limits, particularly in high-cost areas. HERA raised the maximum loan amount the FHA could insure to 115 percent of an area’s median home price. This limit could not exceed 150 percent of the national conforming loan limit of $417,000 at the time, effectively raising the FHA’s high-cost area loan limit to $625,500.

The act also addressed down payment requirements, codifying a minimum of 3.5 percent of the home’s appraised value or sales price. A more restrictive change was the prohibition of seller-funded down payment assistance programs. These programs were associated with significantly higher default rates, and their elimination was intended to improve the financial soundness of the FHA’s insurance fund.

Secure and Fair Enforcement for Mortgage Licensing Act

Title V of HERA is the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act. This law addressed the lack of consistent licensing and registration standards for mortgage loan originators (MLOs). Before the SAFE Act, standards varied widely between states, and many MLOs were not subject to meaningful oversight, contributing to risky lending practices.

The SAFE Act mandated a nationwide licensing and registration system for all MLOs. It required every state to enact legislation implementing minimum licensing standards. MLOs working for depository institutions like banks and credit unions were required to be registered at the federal level.

A component of this framework was the creation of the Nationwide Mortgage Licensing System & Registry (NMLS). The NMLS is a centralized online database for MLOs to manage their licenses or registrations. The system provides a unique identifier for each MLO, allowing regulators and consumers to track their employment history and any public disciplinary actions.

To obtain and maintain a license, the SAFE Act imposed several requirements on MLOs to increase accountability and professionalize the mortgage origination industry. These requirements include:

• Completing at least 20 hours of pre-licensing education courses
• Passing a standardized national written test
• Undergoing both a criminal background check and a credit check
• Completing annual continuing education to maintain their licenses