Home Loans Impacted by Government Shutdown

With mortgage rates dipping and mortgage applications down last week, we’re already seeing a ripple effect caused by a shift in consumer confidence and the slowing process in mortgage approvals, caused by the government shutdown. But what’s in store for homebuyers trying to secure home loans if the shutdown lasts much longer? 

The last government shutdown

The last time we went through a government shutdown was late 1995 through early 1996 and according to the Congressional Research Service, it cost the country $1.4 billion and home loan processes took longer. In fact, the Department of Veterans Affairs (VA) warned in its recent contingency plan that during the 1995-96 government shutdowns, “Loan Guaranty certificates of eligibility and certificates of reasonable value were delayed.” 

Government home loan access: Who‘s open and who’s not? 

With more than 90% of all loan activity underwritten, insured, or owned by the government and its affiliates, many are wondering how the shutdown will affect homebuyers’ access to new home loans. 

Initially at least, the mortgage market is expected to only be minimally affected, with new home loans continuing to push through the process, though at much slower speeds.  

As the shutdown wears on though, you can expect great delays in the loan process as well as residual effects on the housing market, especially in rural areas and on new construction and eventually impacting both buyers and sellers in the housing market as a whole. 

Fannie Mae & Freddie Mac purchased and securitized mortgages, it should be noted, will remain unaffected, since the fees charged to lenders and borrowers pay for operations. 

The VA will also continue to guarantee mortgages for veterans, since user fees fund these loans as well. 

The Federal Housing Administration (FHA) single-family loan operations, which currently endorses about 15% of the entire single-family mortgage market, will also remain open for business with a limited number of FHA staff available to underwrite and approve new home loans. (That’s because the FHA’s single-family loan operations are funded through multi-year appropriations, which means their budget is not tied to the current government budgetary standoff.) 

The FHA’s Multifamily Housing Office, funded through yearly appropriations, will however be affected – how deeply depends on how long the shutdown turns out to be. According to HUD’s report, “ . . . we don’t expect the impact on the housing market to be significant, as long as the shutdown is brief. If the shutdown lasts and our commitment authority runs out, we do expect that potential homeowners will be impacted, as well as home sellers and the entire housing market.” 

The Department of Agriculture (USDA) says that no new housing loans or guarantees will be issued through its Rural Development programs and also warns that this could cause “a setback in construction start-up,” and if the shutdown persists for an extended period it could result in, “a substantial reduction in housing available in rural areas relative to population.”

Other reasons for home loan delays

The Internal Revenue Service (IRS) is out of reach. With IRS staffers on furlough and documents like the 4506 Transcript, which verifies borrower’s federal tax return for lenders, and Social Security Number Verification stalled out, smaller lenders peddling adjustable rate mortgages to investors may hit a roadblock.

Federal Emergency Management Agency (FEMA) homes (those listed in flood zones) will find it hard to close, due to their inability to obtain flood insurance.

Federal Employees employment verifications for new mortgage loans may be delayed or unavailable during the shutdown making it impossible for them to complete their purchase until the government reaches an agreement.

Though it looks as though we can expect to see the mortgage market largely up and running during the government shutdown and homebuyers maybe even continuing to reap the benefits of falling mortgage rates, one thing is for sure – the longer the shutdown goes on, the worse the fallout may be for the U.S. housing market.