How the Government Shutdown Impacts Mortgage Loans
Compared to some federal government functions, the government shutdown that began on December 22, 2018, is having relatively minor effects on services that are essential to homebuyers, sellers, and homeowners. However, the longer the shutdown continues, the more significant the impact will be upon consumers because backlogs may develop, since skeleton staffs are keeping critical functions operating in HUD, FEMA, and other agencies. Also, as time passes, funding may run out and even minimal staffs will have to be shut down.
- Reverse mortgages. Home Equity Conversion Mortgages (HECM) are backed by FHA and are not being processed during the shutdown because the appropriations funding these loans are capped.
- Title 1 loans (including 203k loans). These are fixed-rate loans used for home improvements, repairs, and rehab that are insured by FHA. As with HECMs, the amount that can be spent to ensure these loans are capped annually.
- USDA Rural Development mortgages (Section 502, 503, 504). Direct and indirect low down payment mortgages for rural residents financed by the US Department of Agriculture’s Rural Development Service is not being processed. Borrowers are not able to secure loans, make loan payments, or reamortize loans.
- Social Security verification. Fannie Mae and Freddie Mac require lenders verify Social Security numbers before closing. The Social Security Administrations is shut down, and SS numbers cannot be processed during the shutdown, Fannie and Freddie have temporarily revised their policies to allow lenders more time for validation.
- Housing statistics. Housing data and all other housing research will not be available during the shutdown. The Q4 2018 Homeownership report due January 29 and the January new homes starts release due January 17 may be postponed.
- IRS transcripts for verification. Lenders verify mortgage applicants’ income with the IRS. Borrowers must sign a release allowing the lender to obtain a transcript of their tax returns. Usually, this is included with the closing documents but can be added later Shen the shutdown began on December 22; the IRS stopped verifying returns. Under industry pressure, verification resumed on January 4.
- FEMA flood insurance. On December 26, FEMA announced it would not process applications for flood insurance during the shutdown. It changed its mind two days later in response to an uproar in the housing industry. For more information refer to the flood insurance policies and FEMA Reversal.
- FHA Applications. HUD will process new loans during the shutdown (except for Title 12 and 203k rehab loans cited above). However, HUD is working with a skeleton staff and cannot process loans that require assessment by an FHA underwriter or other intervention by FHA personnel.
- VA Loans. The Veterans Administration and all its programs, including VA home loans, were fully funded under appropriations legislation that was passed by Congress earlier in 2018 and is not subject to the shutdown.
- Fannie Mae and Freddie Mac. These are not government agencies and are not funded by Congress. Though the shutdown impacts some of their policies, both Fannie and Freddie are open for business.
- HUD. In addition to FHA, HUD will continue to make Section 8 housing voucher payments, which assist low-income families.
Summary: The Shutdown Is Having Little Impact on Real Estate
On January 7, the National Association of Realtors conducted an online survey of its members and found that only about 11 percent are reporting any problems affecting their businesses from the shutdown.
NAR’s online survey of its members had 2,211 usable responses. Seventy-five percent reported no impact to their contract signings or closings. However, 11 percent did report problems affecting current clients and 11 percent impacting potential ones. Those respondents were asked for further details and could give more than one response.
The most common impact, noted in 25 percent of responses, came from non-government employee clients who decided not to buy due to general economic uncertainty. Some 9 percent of Realtors reported federal employees also were not ready to buy. Six percent of respondents had a seller who could not sell because of their employment. Three percent had a buyer who received a lender rejection because they were either a federal employee or a contractor furloughed by the shutdown and another three percent had a federal contractor employee who decided not to buy because of lost income.
Lender delays were another reported problem, and 17 percent reported that this occurred with a USDA loan, 9 percent with an FHA loan and 6 percent a VA loan. In addition, 13 percent said they had encountered problems due to a lack of an IRS income verification. There were also bids lost due to the type of buyer financing; 6 percent because the buyer was using an FHA loan, 4 percent because of a USDA loan, and 3 percent due to a VA loan.