04/09/2011 - Government
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 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
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 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.