Here's what a government shutdown could mean for housing

Americans concerned about the government shutdown affecting whether their mortgage applications will be delayed or their refinancing will be put on hold can breathe — for now.

Both Fannie Mae and Freddie Mac have announced temporary policies to help not only federal employees but also contractors, vendors and others whose jobs or incomes are directly affected by the shutdown.

Lenders will have more flexibility in verifying employment and income, so applicants aren’t penalized due to circumstances outside their control. Even furloughed workers will be able to move forward with the mortgage process if their paperwork is in order.

For those struggling to make payments, servicers are allowed to offer forbearance plans, providing temporary relief to keep homeowners from slipping into foreclosure. And if the government can’t process tax or Social Security verifications, both Fannie Mae and Freddie Mac allow lenders to find alternative ways to verify information.

Freddie Mac warned that if the shutdown continues into November, however, borrowers may need to show two months of reserves or meet the more stringent minimum that Freddie Mac’s automated system requires. They also specifically reminded lenders that flood insurance requirements remained unchanged, even if the National Flood Insurance Program were to lapse during the shutdown.

Fannie Mae and Freddie Mac are government-controlled entities that set guidelines for the conventional loans they buy and package into securities that can be sold to investors. As a result, lenders often follow their lead. Since they do not rely on congressional funding, they can continue to do business during the shutdown.

It’s important to note that private lenders, banks and credit unions originate the majority of conventional mortgages. These institutions are unlikely to encounter issues even as federal agencies pause operations.

However, those applying for government-backed loans through the Federal Housing Administration, Department of Agriculture and Department of Veteran Affairs could face delays in processing and closing, according to the National Association of Home Builders.

The U.S. Department of Housing and Urban Development said most FHA loans will still be endorsed during the shutdown, but some programs — including reverse mortgages and Title I loans for home improvements — are paused. Essential services, such as processing claims and managing foreclosures, will continue through contractors, but any tasks requiring direct HUD staff, such as condo development approvals, will be put on hold. FHA borrowers should expect possible delays in loan processing, though help for struggling homeowners will continue.

Meanwhile, the VA confirmed that “housing benefits” will continue, meaning guaranteed home loans, and lenders may continue to process applications.

Another area of the housing market is USDA loans, which go to buyers in eligible towns and rural areas. The National Association of Realtors said the USDA would halt issuance of new direct and guaranteed loans, and any scheduled direct-loan closings would also be postponed.

Reflecting the party-line tension that roiled the nation on Wednesday, the USDA posted this statement on its website: "Due to the Radical Left Democrat shutdown, this government website will not be updated during the funding lapse. President Trump has made it clear he wants to keep the government open and support those who feed, fuel, and clothe the American people.”

USDA did not respond to a request to comment.

The government standoff is already jeopardizing the release of crucial economic data that the Federal Reserve needs to inform its decisions, which means policymakers and economists will rely more heavily on private reports. For example, Wednesday’s report from the payroll processing firm ADP signaled that U.S. companies' payrolls unexpectedly dropped in September, reinforcing signs of a cooling labor market.

That news pushed 10-year Treasury yields to their lowest level in two weeks, as investors speculate on whether the Fed might lower interest rates again later this month. Mortgage rates tend to follow the 10-year Treasury yield.

“Mortgage rates initially won't be impacted by the shutdown; however, if it drags on, then investors will raise fears about the credit quality of U.S. debt, bond yields could go higher, and mortgage rates will increase,” Melissa Cohn, regional vice president of William Raveis Mortgage, said in an email.

“We’re only in the initial stages of the shutdown,” Cohn said, noting that she hasn't heard from panicked clients — yet. “It's business as usual, but with delays on loans impacted by the shutdown, we’ll need to see what happens,” she said.

Last week, the 30-year fixed mortgage rate averaged 6.3%, up from 6.26% a week earlier, according to mortgage giant Freddie Mac.

Another significant impact that homebuyers face during a government shutdown is the lapse in authorization for the National Flood Insurance Program, which insures about 5 million homes across the country. When the NFIP isn’t authorized, homeowners can’t purchase policies or renew existing ones. While current NFIP policies remain in force until their expiration date, they can’t be renewed until Congress reauthorizes the program — a fact the Treasury Department and federal regulators confirmed.

This gap in coverage is especially critical because standard homeowner insurance doesn’t cover flood damage. For anyone buying a home in a high-risk flood zone — known as a Special Flood Hazard Area — flood insurance is required to close on a mortgage.

Some lenders may allow closings to proceed if private flood insurance is available and accepted; however, this is not always an option. According to First Street, a New York-based nonprofit research company, “While private insurers may fill some gaps, coverage could become less consistent, straining household finances and complicating mortgage markets.”

The ripple effects are substantial. Nationwide, the National Association of Realtors estimates that a lapse in the NFIP would affect about 1,300 property sales each day —roughly 40,000 closings per month. For buyers and sellers, that means uncertainty, delays, and in some cases, deals that simply can’t go forward.

For current homeowners, the risks are just as real. If an NFIP policy expires during the shutdown, there’s a risk of being uninsured from flood damage until the program resumes and the policy can be renewed. This leaves families financially vulnerable if a flood occurs during the lapse. The good news: Claims on existing, in-force NFIP policies are still paid as long as the policy was active before the lapse.

Experts urge homeowners to stay in close contact with their lender and insurance agent to understand their options and requirements. It’s also wise to keep documentation of all communications and any attempts to renew coverage.

“There are two full months between today and the end of hurricane season, and every day, more and more Americans will be needlessly put at risk of losing everything in a flood. We cannot allow this to happen,” said Neil Alldredge, president and CEO of the National Association of Mutual Insurance Companies.

He added, “Decades of poor policy decisions — from failing to maintain adequate flood mapping to hidden subsidies that provide a false sense of security and encourage development in flood-prone areas — have put millions of Americans in the path of floodwaters. Many of them, though not enough, wisely chose to protect themselves by purchasing flood insurance through the NFIP. They should not be put at risk because Congress cannot do its job.”