What Was the Housing and Economic Recovery Act?

The Housing and Economic Recovery Act of 2008 (HERA) was a legislative package enacted in the United States in response to the subprime mortgage crisis that had destabilized the nation’s housing market and financial system. The act’s goals were to restore confidence, provide relief to struggling homeowners, and implement stronger regulatory frameworks.

The legislation aimed to stabilize residential property values and assist families at high risk of foreclosure by providing new avenues for refinancing. The act also intended to overhaul the oversight of key institutions within the housing finance system.

Creation of the Federal Housing Finance Agency

A component of the Housing and Economic Recovery Act was the establishment of the Federal Housing Finance Agency (FHFA). This new federal body was created as an independent regulator, consolidating authority that was previously divided among other agencies. The FHFA was granted oversight powers over the government-sponsored enterprises (GSEs), including Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks.

The creation of the FHFA was a direct response to the financial condition of Fannie Mae and Freddie Mac. These two institutions are part of the secondary mortgage market, where they provide liquidity by purchasing mortgages from lenders. As the housing crisis deepened, the value of the mortgages they held or guaranteed plummeted, pushing them toward insolvency. The act gave the FHFA the authority to place the GSEs into conservatorship or receivership to maintain stability in the housing finance system.

In September 2008, the agency placed both Fannie Mae and Freddie Mac into government conservatorship. This action meant the federal government took control, replacing their chief executives and boards of directors. The goals of the conservatorship were to preserve the assets of the GSEs, restore them to a sound and solvent condition, and ensure they could continue to support the availability of mortgage credit.

Under conservatorship, the U.S. Treasury Department committed to injecting capital into Fannie Mae and Freddie Mac to cover their losses and keep them operational. This intervention was necessary to prevent a failure that would have paralyzed the housing market. The FHFA, as conservator, has since managed the operations of the GSEs, directing their business activities to fulfill their public mission.

The HOPE for Homeowners Program

The Housing and Economic Recovery Act introduced the HOPE for Homeowners (H4H) program to help homeowners facing foreclosure. The program, which ran from October 1, 2008, to September 30, 2011, authorized the Federal Housing Administration (FHA) to insure new mortgages for distressed borrowers. Its purpose was to help families refinance out of risky loans into government-backed 30-year fixed-rate mortgages.

Participation in the H4H program was voluntary for both borrowers and lenders. For homeowners, the property had to be their primary residence, and the original mortgage must have been originated on or before January 1, 2008. A financial requirement was that the borrower’s mortgage debt-to-income ratio as of March 1, 2008, had to be greater than 31 percent.

The refinancing process required significant concessions from lenders. For a homeowner to receive an H4H loan, the existing mortgage lender had to agree to write down the outstanding principal balance of the original loan. The new FHA-insured mortgage could not exceed 90% of the home’s current appraised value. In exchange for this refinancing, the homeowner had to share a portion of any future equity with the FHA upon selling or refinancing the property.

The HOPE for Homeowners program saw much lower participation than initially projected. The strict requirements for both borrowers and lenders proved to be a barrier. Lenders were often hesitant to incur the large principal write-downs required, and many distressed borrowers found they could not meet the program’s financial or documentation standards, which limited the program’s overall impact on the foreclosure crisis.

Neighborhood Stabilization Program

HERA also sought to address the community-level consequences of the housing crisis through the Neighborhood Stabilization Program (NSP). The program allocated grants to state and local governments to implement targeted recovery strategies to mitigate the effects of foreclosures and property abandonment. Grantees could use the funds for specific, eligible activities aimed at stabilizing neighborhoods.

• Establishing financing mechanisms, such as loan pools or interest rate subsidies, to encourage the purchase of foreclosed homes.
• Purchasing and rehabilitating abandoned and foreclosed-upon homes and residential properties.
• Demolishing blighted structures that were beyond repair, clearing the way for new development.
• Creating land banks, which are public or community-owned entities created to acquire, manage, and redevelop vacant, abandoned, and foreclosed properties.

A requirement of the NSP was that all funds had to be used to benefit individuals and families with incomes not exceeding 120 percent of the area median income. Furthermore, at least 25 percent of the funds had to be reserved for housing individuals or families whose incomes were at or below 50 percent of the area median income. This ensured that the program’s benefits were directed toward low- and moderate-income households.

Key Tax Provisions for Individuals

The Housing and Economic Recovery Act also contained tax provisions aimed at stimulating the housing market, including the First-Time Homebuyer Tax Credit. For homes purchased on or after April 9, 2008, and before July 1, 2009, the act provided a tax credit equal to 10% of the purchase price, capped at a maximum of $7,500. To qualify, an individual had to be a “first-time” homebuyer, defined as someone who had not owned a principal residence during the three-year period prior to the purchase. The credit phased out for individuals with modified adjusted gross incomes over $75,000 and joint filers with incomes over $150,000.

The 2008 version of this credit had a repayment requirement. Taxpayers who claimed the credit were required to pay it back in equal installments over a 15-year period, starting with their 2010 tax return. If the homeowner sold the house or it ceased to be their main residence during the repayment period, the entire remaining balance of the credit became due.

HERA also introduced a temporary additional standard deduction for state and local real property taxes. This was for taxpayers who did not itemize their deductions. For 2008, non-itemizers could increase their standard deduction by the amount of property taxes they paid, up to $500 for single filers and $1,000 for married couples filing jointly.

Modernization of Federal Loan Programs

HERA included the modernization of federal loan programs. The act made significant changes to the lending standards of the Federal Housing Administration (FHA) by temporarily increasing its conforming loan limits. A conforming loan limit is the maximum size of a mortgage that government-sponsored enterprises can purchase or guarantee.

During the financial crisis, the market for “jumbo” loans—mortgages that exceed these limits—had virtually disappeared. This left a gap in mortgage financing, especially in high-cost areas. By raising the FHA’s loan limits, HERA allowed the agency to insure larger mortgages. This provided a vital source of liquidity.

HERA established a new, permanent formula for calculating loan limits in high-cost areas. The limit was set at 115% of the local area’s median home price, but it could not exceed 150% of the national conforming loan limit. For 2008, this created a temporary ceiling of $625,500 in the most expensive markets. This measure ensured that government-backed loans remained a viable option for a larger segment of borrowers.

The act also implemented modernizations for the FHA. It established a minimum down payment requirement of 3.5% for FHA-insured loans. The adjustments were part of a broader effort within HERA to strengthen government lending programs.