There’s been a lot of rhetoric coming from both sides of the congressional aisles these days; from Democratic and Republican parties and even a few in between. But recently the media has begun reporting government shutdown fallacies as facts. I’ve stayed out of this very heated political discussion for obvious reasons, but when a client recently sent me this article Shutdown impact: Tourists, homebuyers hit quickly from of all places the Associated Press, I just had to respond.
Although the nation’s largest insurer of conventional mortgage loans, Fannie Mae (FNMA) and Freddie Mac (FHMLC) have been in receivership since 2008, (a non-mans land somewhere between bankruptcy and state control) a government shut-down will have no impact on your mortgage application because neither of these entities actually fund mortgage applications. Instead, it is private lenders like AES Lending who underwrite, approve and fund mortgage loan applications according to the FNMA & FHLMC Guidelines .Once funded, the loan could then be sold to either Fannie or Freddie or any other buyer of Mortgage Backed Securities (MBS). With the recent reversal of the Federal Reserve’s MBS buying program, it is unlikely that there will be any delay or cash crisis that could results from a government shut down.
Sam Hananel’s, Associated Press article asserts “the Federal Housing Administration, which guarantees about 30 percent of home mortgages, wouldn’t underwrite or approve any new loans during the shutdown”. This is patently false because like conventional insurers FNMA & FHLMC, in most cases the FHA doesn’t underwrite loans! Rather, the majority of the FHA loan activity is to insure loans but only after a loan application been underwritten and funded by an approved lender after the application has been determined to meet FHA guidelines. Even the issuance of FHA Case Numbers have been issued via the web for the better part of a decade. Therefore, like Conventional loans, no delay could be expected from a government shut-down. However, in cases where HUD needs to be involved, as in the case of REO (Foreclosed properties owned by HUD) a shutdown could slow down a process that is already incredibly slow.
The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market. (FHA endorsements currently represent 15% of the market.) Approximately 80% of FHA loans are endorsed by lenders with delegated authority. The remaining 20% are endorsed through the FHA Homeownership Centers, leveraging FHA staff with a contractor that works on-site. - HUD FY2013 Contingency Plan for Possible Lapse
It may be difficult to obtain flood insurance through FEMA during this period which would delay closing if your lender required flood insurance.
Internal Revenue Service (IRS)
The IRS has indicated that they will not process any forms, including the issuance of tax return transcripts (Form 4506T) during a government shutdown, which will delay loan processing and closing.
Social Security Administration (SSA)
Unknown but SSA usually has only employees that deal directly with the processing of new claims and benefits still active. Verification is not an essential service, so likely we would not be able to continue to verify Social Security Numbesr through the SSA, which will delay loan processing and closing.
Like FHA loans, VA Loans are underwritten according to the VA standard. However, there are some instances where a delay in ordering appraisals could occur, but because most of that is handled electronically the delays should be minimal. However, unlike AES Lending, there are some lenders who do not issue Notice of Values who have to obtain the NOV form the VA and will not be able to close a VA Loan during a government shutdown. Therefore if you are applying for a VA loan during the 2013 government shutdown you should check with your lender first and see if they will be able to issue a Notice of Value or if they will require the VA to issue one. I the answer is the latter, then you will not be able to close your loan until a bargain is made to fund the government otherwise the VA Loan Program remains open.
The USDA has a long history of running out of money by the end of their fiscal year which is September 30 and this year is no exception. In years past, lenders would continue to underwrite and approve and fund these loans with the promise (loan approval) from the USDA that upon congressional replenishment if their funds, they would issue the guarantee.
USDA files can continue to be processed, underwritten and shipped to USDA; however no Conditional Commitments will be issued until the shutdown is over.
Reminder that the October 1st change to eligible locations has also been put on hold for the moment but it is unknown if the change to the new list will be backdated to 10/1/13.
Originators may continue to accept and process loans that would be eligible under an old area but not under the new designated areas; however recommend making clients aware that loan may need to be switched to FHA program if property is deemed no longer eligible.
However, because this year it is expected that many of the USDA eligible maps will be re-drawn, this could impact buyers who otherwise may have been shopping in an area that was slated to be no longer eligible for USDA housing. Lenders who in the past may have accepted the approval and promise to issue the guarantee, my not be so eager to fund those loans until congress fully funds the USDA Rural Housing Development program.
A ray of hope for USDA loans
In October 2011 the Bipartisan Policy Center (BPC) launched the Housing commission to develop a new vision for federal housing policy that provides a path forward during this period of great change. The co-chairs of this committee reads like a who’s who of DC politics during the past 3 decades and includes:
- Christopher S. “Kit” Bond Former U.s. senator; Former governor of Missouri
- Henry Cisneros Former secretary, U.s. Department of Housing and Urban Development
- Mel Martinez Former U.s. senator; Former secretary, U.s. Department of Housing and Urban Development
- George J. Mitchell Former U.s. senate majority leader; co-Founder, Bipartisan Policy center.
As a result of their findings they have recommended that congress:
Extend the current definition of rural areas through the year 2020. Any area currently classified as rural for the purposes of UsDA housing programs should remain so at least until after the receipt of data from the decennial census in 2020, provided the area’s population does not exceed 25,000. – Economic Policy Program Housing Commission
Essentially the commission is advising that the state of the U.S. housing market recovery is so fragile that Congress should leave the existing USDA maps as they were in the 2000 census and not change them until 2020. But this would take an act of congress to approve, therefore, at least in this area, a government shut-down WOULD have some negative impact on home buyers. However, fewer than 5%^ of all mortgage originated this year have been USDA loans, therefore any impact would be minor to the overall health of the real estate markets as a whole.
Ricardo Cobos is a Mortgage Loan Officer in Raleigh North Carolina expertly assisting financing homes with low interest rates and low down payment Conventional, FHA and VA mortgage loans for move up buyers and first time home buyers alike. Call me at (919)526-0183 or email me your questions , I’m here to help!
- FHA-backed mortgages will be halted in a shutdown (wyff4.com)
- A Government Shutdown – What Would it look like? (nbcnews.com)
- 66 Questions and Answers About the Government Shutdown (usatoday.com)
- What is a USDA Loan? (theraleighmortggaeguy.com)
- What is an FHA 203(k) loan good for? (theraleighmortggaeguy.com)