The Federal Shutdown: A Perfect Storm for the Mortgage Market?

The recent shutdown of the federal government amplifies the dampening effects of the 2008 market crash and the recent sequestration.  There is a widespread fear that this convergence of economic forces could create a “perfect storm” that may cripple the national and local economies for the foreseeable future.  Today’s mortgage market is a perfect example of the unforeseen consequences the government shutdown is having on every aspect of our economy.

Prince William County Board of Supervisors Chair, Corey Stewart, recently said that the impact of the federal government shutdown could be “potentially devastating” to the County.  Prince William County’s workforce totals nearly 235,000, around 45,000 of whom are federal workers.  Sharon Bulova, the Board of Supervisors Chair of neighboring Fairfax County, says that the shutdown is costing Fairfax County federal workers $1,608,194.52 per day in lost salaries.  It’s not just the loss in local sales taxes or the closing of Manassas Battlefield Park that these local policymakers are worried about.  It’s the “ripple effect” the shutdown may have on the local economy.

Obstacles Galore
Housing, as everyone knows, is the engine that drives our economy and the housing industry is taking a beating from the shutdown.  In addition to restrictive lending policies, potential homebuyers face new and, at least for the time being, nearly insurmountable hurdles to obtaining a mortgage.

Lenders rely on the Social Security Administration (SSA) to verify borrowers’ Social Security numbers as a way of confirming their identity.  With the SSA on furlough, there is no way for lenders to obtain this verification

In order to get a loan, every borrower must submit an IRS Form 4506T.  This form is used to order tax transcripts to verify the potential buyer’s income.  Lenders absolutely must have the transcripts to process a loan and with the government shut down, there’s no way to obtain them.  For the time being this is not a huge problem because there are plenty of buyers who have already completed this part of the process, but as time goes by the logjam will grow.  When the government finally does open, this backlog will increase delays in processing loans.

Government workers will also be frozen out of the market because government workers who are furloughed cannot close on a loan.  Even “essential” government workers may not be able to obtain loans because lenders require verification of employment and the government agencies that do this are closed.

Because the U.S. Department of Agriculture is shut down, no USDA Rural Development (RD) home loans will be processed.  This, together with sharply curtailed operations by FHA, means that low down-payment loans will be almost impossible to obtain.  First-time and lower-income homebuyers will effectively be frozen out of the market.

During the shutdown, FHA will be operating with a skeleton crew of less than 5-percent of its usual staff.  Since FHA loans accounted for nearly half of all home mortgages issued in 2012, averaging around 60,000 each month, the implications for homebuyers are huge.  This situation is somewhat mitigated by the fact that larger lenders can still close FHA loans because they have the authority from the FHA to approve the loans.  This applies to 80% of FHA loans.  The remaining 20% of loans that are issued by small lenders will be in limbo until FHA staff can review them.  Small lenders will be adversely affected by the shutdown because potential clients will take their business to lenders who have the authority to approve their loans.

Homebuyers with FHA loans may find that sellers don’t want to accept their offers because of the delays that are anticipated in processing loans once FHA is up and running again.  Borrowers also worry that the favorable rates they’ve locked into might not be extended to cover long delays in loan processing.

During the shutdown, FHA won’t process “Title 1” manufactured housing and home-improvement loans and reverse mortgages.

A New Foreclosure Crisis?
If the shutdown lasts longer than a few weeks, government workers on prolonged furlough may not be able to pay their property taxes.  This raises the spectre of a new foreclosure crisis following on the heels of a very recent, somewhat sluggish recovery.

The most damaging effect of the shutdown will be the loss of the consumer confidence that is essential to the health of the real estate industry.  Since the government shutdown, nearly 500 local-area residential listings have been taken off the market, according to the Metropolitan Regional Information System.  Even historically low interest rates won’t motivate potential buyers who believe that shopping for houses is pointless since home loans are unobtainable.