The Housing and Economic Recovery Act of 2008 (HERA) was landmark legislation enacted in response to the subprime mortgage crisis that precipitated the Great Recession. Signed into law by President George W. Bush on July 30, 2008, the Act aimed to stabilize the housing market and restore confidence in Government-Sponsored Enterprises (GSEs) such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.
Key Provisions
Creation of the Federal Housing Finance Agency
HERA established the Federal Housing Finance Agency (FHFA) by merging the Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance Board (FHFB). The FHFA was endowed with enhanced regulatory authority over the housing-related GSEs to:
- Establish Standards: Implement standards for capital requirements, risk management, and corporate governance.
- Restrict Asset Growth: Control and limit the growth of assets held by the GSEs.
- Increase Enforcement: Enforce compliance and take punitive actions against entities violating regulations.
- Receivership Powers: Place failing GSEs into receivership to manage and mitigate financial distress.
Housing Trust Fund and Capital Magnet Fund
The Act created two funds aimed at increasing affordable housing options:
- Housing Trust Fund (HTF): To provide grants for the production, preservation, and operation of affordable housing for low-income households.
- Capital Magnet Fund (CMF): To attract private capital for affordable housing and economic development activities.
Impact on Fannie Mae and Freddie Mac
Fannie Mae
Fannie Mae (Federal National Mortgage Association) was subject to increased oversight to ensure accurate reporting and effective risk management practices. The enhanced regulatory framework aimed at preventing another financial collapse by mandating higher capital reserves and stricter lending guidelines.
Freddie Mac
Freddie Mac (Federal Home Loan Mortgage Corporation) faced similar regulatory scrutiny under the FHFA, with the goal of stabilizing its financial health and ensuring its ongoing role in the secondary mortgage market.
Federal Home Loan Bank System
The Federal Home Loan Bank System includes 11 regional banks providing loans to financial institutions to support mortgage lending and community investments. HERA aimed to bolster this system by enhancing regulatory oversight and ensuring liquidity in the housing finance market.
Historical Context
The subprime mortgage crisis, characterized by a dramatic increase in high-risk mortgage defaults, led to widespread financial instability. Major financial institutions suffered significant losses, leading to a credit crunch and severe economic recession. HERA was a critical response by the U.S. government to address these issues and restore stability to the housing market.
Applicability
The Act remains a foundation of the current regulatory landscape for housing-related GSEs and continues to influence housing finance policies. The FHFA’s ongoing role in monitoring and regulating Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System is crucial to ensuring the stability of the U.S. housing market.
Comparisons
HERA vs. Dodd-Frank Act
While HERA specifically targeted the housing market and GSEs, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 addressed broader financial market regulations and consumer protections, including the establishment of the Consumer Financial Protection Bureau (CFPB).
Related Terms
- Government-Sponsored Enterprises (GSEs): GSEs such as Fannie Mae and Freddie Mac are financial services corporations created by Congress to enhance the flow of credit to specific sectors of the economy.
- Subprime Mortgage: A high-risk loan offered to borrowers with poor credit histories, often characterized by higher interest rates and less favorable terms.
- Receivership: A form of financial distress management where a regulatory agency takes control of a failing entity to restructure and stabilize its operations.
FAQs
What prompted the creation of the Housing and Economic Recovery Act of 2008?
What are the main functions of the Federal Housing Finance Agency (FHFA)?
How does HERA impact affordable housing?
References
- U.S. Congress. “Housing and Economic Recovery Act of 2008.” Legislation Text.
- Federal Housing Finance Agency. “FHFA’s Role in the Housing Market.” FHFA.gov.
- Fannie Mae. “About Fannie Mae.” FannieMae.com.
- Freddie Mac. “Our Mission and Goals.” FreddieMac.com.
Summary
The Housing and Economic Recovery Act of 2008 fundamentally reshaped the regulatory framework for the U.S. housing market, particularly for the GSEs like Fannie Mae and Freddie Mac. Through the creation of the FHFA, the Act provided enhanced regulatory oversight to stabilize these entities, promote affordable housing, and prevent future financial crises arising from the housing sector. The legacy of HERA continues to influence housing finance and regulation today.
