The mortgage market should only be minimally impacted by the recent government shutdown
The federal government shut down at the stroke of midnight on September 30th as the Congress failed to pass a bill to continue funding the government. The repercussions are many, including preventing 800,000 Americans from getting paid, suspending various government services, and costing the economy approximately $1 billion per week. At least for now, however, the housing market is likely to avoid the brunt of the pain, unless the shutdown continues beyond just a few days.
While more than 90% of all mortgage loan activity is underwritten, insured, or owned by the government and its affiliated entities, initially at least, the mortgage market is likely to be only minimally impacted. New loans will continue to push through most government agency pipelines, although it is likely that the process will take longer and experience delays.
Which government agencies will be affected and how?
Specifically, mortgages purchased and securitized by Fannie Mae and Freddie Mac will be unaffected because their operations are paid for by fees charged to lenders. And the Department of Veterans Affairs will continue to guarantee mortgages for Americans that have served in the military since these loans are funded by user fees as well.
In contrast, the Department of Agriculture will suspend its loan activity, with no new housing loans or guarantees being issued through its Rural Development programs during the shutdown. The department also warns that such a scenario could cause a setback in construction start-up, and if the shutdown lasts for an extended period, a substantial reduction in housing available in rural areas relative to population.
The news is mixed when it comes to the Federal Housing Administration, which currently endorses about 15% of the entire single-family mortgage market. The FHA’s Office of Single Family Housing will remain open, albeit with a smaller staff, and thus will be able to endorse single family loans during the shutdown, and underwrite and approve new loans. The reduced staffing will cause delays, however. The FHA’s Multifamily Housing Office will be more affected and may not be able to underwrite loans. No condo projects will be approved during the shutdown. If the shutdown continues, however, and the FHA’s commitment authority runs out, then homeowners, home sellers, and the entire housing market will be impacted.
For loan originators, this means that as long as the shutdown does not last more than a week or so, operations will be minimally affected. They will still be able to write conventional (Fannie and Freddie) and FHA loans and to get an FHA case number, and the FHA Total Scorecard will still be available. Similarly, they will still be able to write VA loans and obtain Certificates of Eligibility online.
But loan processing may be delayed due to other government functions being curtailed or suspended. For example, the Internal Revenue Service will not process forms, such as the 4506 (Request for Copy of Tax Return), during the shutdown, and without income tax transcripts – required for loans to close – some processing will be delayed. The Social Security Administration will not verify social security numbers during the shutdown, slowing loan processing. And the ability to get new flood insurance policies through the Federal Emergency Management Agency will be delayed, which could affect home purchases.
A longer shutdown may have a more significant impact
The modest effects of the shutdown described above become significantly worse, however, if the shutdown drags on, and would inevitably put pressure on the housing recovery. Economists estimate that a shutdown of several weeks would cut economic growth by 1.4% as furloughed workers cut their spending and economic activity and investment slows, causing a ripple effect throughout the economy.