While many federal agencies crucial to the business are operating normally, a prolonged partial government closure threatens to disrupt mortgage applications, increase delinquencies.
Most housing markets across the country aren’t yet feeling the effects of the partial federal government shutdown, with 75 percent of realtors® reporting no impact to their business, according to a National Association of Realtors® survey conducted Jan. 7. But that tune may change if the shutdown—now the longest in U.S. History—continues and markets absorb the spillover effect of delayed mortgage application processing, increased mortgage and rental payment delinquencies, and reduced spending in the broader economy. “the government shutdown is an unambiguous negative for the real estate market,” says NAR chief economist Lawrence Yun. “It is delaying activity that would otherwise occur.”
What’s Proceeding Normally
- Applications for conventional home mortgage financing backed by Fannie Mae and Freddie Mac
- Applications for federally backed FHA and VA home mortgage loans
- IRS processing of income verification requests
- Issuance of federal flood insurance
What’s Facing Delays
- Applications for federally backed Rural Housing Service (RHS) loans
- Applications for federally backed reverse mortgage loans, known as home equity conversion mortgages (HECMs)
- Applications for specialty FHA mortgage loans, including loans under the Native American and Native Hawaiian home loan programs
Twenty-two percent of REALTORS® report some kind of impact to current or potential clients, most often involving buyers who see the shutdown, which began at midnight on Dec. 22, as a sign of economic uncertainty and are choosing to delay a purchase, according to the NAR survey.
The shutdown doesn’t affect the whole government. Congress has already passed numerous fiscal 2019 bills appropriating money to federal agencies, which President Donald Trump has signed. But several bills, including one to fund operations of the U.S. Department of Housing and Urban Development, have not been passed, and a broad-based budget deal to meet the government’s outstanding funding commitments collapsed in early January over border security.
As of mid-January, most home purchase transactions were not interrupted because conventional mortgage loans backed by Fannie Mae or Freddie Mac—which comprise the bulk of home purchase finance transactions—were being processed without delay. The same was true for transactions backed by the Federal Housing Administration and the Department of Veterans Affairs, both of which use a delegated lender process in which pre-approved private lenders can originate loans without agency approval as long as the loans are underwritten in accordance with agency guidelines.
The one agency directly involved with home mortgages that has been caught in the shutdown is the Department of Agriculture, which backs loans through the Rural Housing Service. The agency has authority to operate a delegated lender program like FHA’s, but it has not yet implemented the program, and many of its employees are furloughed. “As of right now, all loans must go through RHS for processing, so these loans are not getting approved,” says Megan Booth, NAR’s director of housing policy.
Still, there are more bright spots for real estate. One is the IRS, which verifies borrowers’ income for certain types of mortgage loans, including those for self-employed buyers. After furloughs caused a brief period of delays to income verification requests, the IRS has straightened out issues over its authority to operate and is continuing to work through the shutdown. And for purchases needing federal flood insurance, the National Flood Insurance Program is back in operation after a short period of uncertainty when the shutdown began. “NAR worked vigorously to make sure that that program continues to be up and running, so buyers shouldn’t have problems getting flood insurance with their loans,” Booth says.
Longer-term, though, a continued shutdown will have consequential effects on home sales and the broader economy. “This is fundamentally an issue of confidence,” Yun says. “People are concerned about the direction of the economy and the perception of a chaotic environment in Washington. What we’re going through is not helping people make a firm decision for a major expenditure like a home purchase.”
January 12, 2019