What is the Housing and Economic Recovery Act?

The Housing and Economic Recovery Act is a body of legislation designed to help homeowners at risk of losing their homes and to help people who could not afford to own homes. It was also designed to instill a greater amount of oversight into the mortgage finance system. There were a number of measures put into place to help the government to achieve these aims.

This body of legislation was signed into law by President George W. Bush on 30 July 2008. This was a time when there was significant discontent among homeowners. Due to a financial crisis, large numbers of Americans experienced foreclosure. The Housing and Economic Recovery Act aimed to prevent foreclosure on a larger scale.

For homeowners, a significant element of the act was a provision that allowed the Federal Housing Administration (FHA) to make billions of United States dollars available to insure the refinancing of endangered mortgages. This program was completely voluntary, neither homeowners nor lenders could be forced to participate. Those who did participate had to meet certain requirements.

This Housing and Economic Recovery Act did not allow its assistance to be used by investors or for mortgages on second homes. The program was restricted solely to owner-occupied principal residences. Income restrictions applied to those homeowners who did use the program.

According to the regulations of the act, a homeowner was required to have a mortgage that was at least 32% of his total income to be eligible. People with fraud convictions were deemed ineligible. Furthermore, receiving assistance required that a person certify he did not intentionally default on his mortgage and that he did not obtain his loan using any fraudulent means.

Owners of the mortgage were required to take a loss of at least 10 percent before the government would assist. Those lenders had to voluntarily reduce mortgages to at least 90% of the property's value. This was not, however, a fixed discounted amount. In some instances, the lender could take substantially greater losses.

In addition to discounting the mortgage, lenders were required to waive fees and penalties. They were also required to assist with origination and closing costs for new loans. This program was designed as an investment strategy. Instead of the government granting funds, the Housing and Economic Recovery Act entitled the government to future profits on the homes that they helped save.

Although this temporary program was designed to extend from 1 October 2008 to 30 September 2011, there are several elements that are permanent. The signing of this act into law created the Federal Housing Finance Agency (FHFA). This agency’s purpose is to act as “regulator with all of the authorities necessary to oversee vital components of our country’s secondary mortgage markets.” The FHFA was staffed by merging several federal entities.

Those entities include the Office of Federal Housing Enterprise Oversight, whose focus was the operations of Fannie Mae and Freddie Mac. The Federal Housing Finance Board had the responsibility to regulate a group of financial institutions known as FHL banks. The GSE mission office at the Department of Housing and Urban Development was included as a benefit for community development and to improve homeownership figures while decreasing discrimination.

There was another permanent change that involved Fannie Mae and Fannie Mac. The Housing and Economic Recovery Act included the creation of a permanent affordable housing trust that was to be financed by these two entities. This trust was designed to generate and maintain low and very low income housing.