Government Shutdown Avoided - What would happen to mortgage lending if the Government did shut down?    


by Keith Luedeman, CEO   


04/09/2011 - Government Shutdown Avoided

The US Government was almost shut down midnight on Friday, April 8th. The last time this happened was in 1995 and 1996 when the Government was shut down from November 14 through November 19, 1995, and from December 16, 1995 until January 6, 1996.

It's important to realize the impact of a government shutdown on mortgage lending.  The effect would be rather large.  The following is a list of areas that would be impacted.  It's hard to know 100% exactly what would happen, as 'essential government operations' would be able to continue.  It is unclear if any of these areas would be considered essential.
FHA Loans

FHA loans would largely be shutdown.  And FHA loans are currently approximately 20% of all loans made, and 40% of all purchases.  The issue is that FHA would not be open to insure those loans, which are made with smaller down payments than most.  Some banks could chose to continue to make these loans and hold them until the government re-opens.  But if the shutdown continues for an extended period of more than a few weeks, even larger lenders would not want to take on this risk.

Other FHA loans could be stopped if they have a requirement for a CAIVRS number, which determines if the borrower has a delinquent federal debt. 

Since FHA loans are 40% of all purchases, it could also affect other sales if the customer selling the home needs the home sold to qualify for their next home purchase.  This daisy-chain effect could greatly affect the housing market.

VA and USDA loans would also be affected and largely unavailable.

Conforming Loans

Conforming loans could also be affected by a shutdown.  First, a common requirement to qualify for a loan in 2011 is verification of income by executing Form 4506-T, which allows your lender to obtain a copy of your tax returns from the IRS.  Almost all lenders do this to ensure your income calculations are correct.  If the Government is closed, this would not be possible and lenders could make the decision to decline many loans if income cannot be documented this way.

Additional problems could occur if your property is in a flood zone.  It may be difficult or impossible to obtain flood insurance through FEMA during this time.

Lastly, if your loan requires Social Security Number Validation, this service will not be available.
Is It Over Yet?
The spending fight in Washington continues and it's not over yet - the Government still faces a shut-down threat.  Congress will need to agree to raise the current Federal Debt Ceiling as early as Mid-May.  If agreement cannot be reached, the government will not be able to borrow money by issuing bonds.  In addition to not being able to fund day to day operations, it would not be able to pay off maturing bonds, putting the US Government - the global standard-setter for creditworthiness - in default.

Based on this, we may see mortgage rates rise until a resolution is reached,  as mortgage rates track the 10 year US Bond.

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