As of this writing, the chances of averting a partial shutdown of the federal government are slim to none as members of House blamed the Senate, and members of the Senate blamed the House, for being unwilling to agree on a spending bill that keeps the government running. The Republican-controlled House of Representatives has passed a measure that ties government funding to a delay of President Barack Obama’s healthcare reform law, even as Senate Democrats vowed to defeat it. If a stop-gap spending bill for the new fiscal year is not passed before midnight on Monday, all non-essential government agencies and programs will close their doors for the first time since 1996.
That includes FHA mortgages. These loans account for about 90% of U.S. home mortgages, so if the pipeline stops, that flow could hurt the housing recovery.
The good news is that most government-backed home loans will be unaffected by a shutdown. Fannie Mae and Freddie Mac pay for their operations out of the fees that they charge lenders, so the loans that they purchase and securitize will continue forward.
Of course when someone says “the good news is”, that means there is a flip side of the coin, and that’s the case here. The bad news is that loans guaranteed by the Federal Housing Administration, the Veteran’s Administration and the rural development loans of the U.S. Department of Agriculture, won’t be processed. If an application for an FHA-insured loan has not been approved by the time the government shuts down, it will not be touched until after the shutdown ends.
FHA-backed loans accounted for 45% of all mortgages used to purchase homes issued in 2012, according to the Federal Reserve. In the event of a shutdown, FHA will be unable to endorse any single-family loans and FHA staff will be unavailable to underwrite and approve new loans. The FHA alone insures about 60,000 loans a month. That’s a big chunk of mortgages to just… stop.
Many people who try to buy a home have no alternative to FHA, VA or USDA mortgages. First-time buyers in particular often lack the cash for the 20% down payments that most lenders require. FHA rules allow home buyers to make a down payment of as little as 3.5% of the selling price, which would be $7,000 on a $200,000 home, for example. A 20% down payment on a house of the same price would be $40,000. The FHA is also more flexible about borrowers who have had payment problems in the past, or who have short credit histories.
“The housing market is searching for recovery, and we’ve been seeing signs of optimism,” said David Stevens, CEO of the Mortgage Bankers Association. “This could have a sizable impact on the recovery.”
A slowdown in the processing of home mortgages would have ripple effects beyond the housing market. When people buy a home, it triggers economic activity in related industries. Home buyers have their newly purchased homes painted, floors or carpeting installed, new decks built, and landscaping completed. They also fill their homes with furniture and electronics. If a shutdown drags on for more than a few days, the impact on the real estate market and the economy could be quite significant.
No one agrees on what’s really going to happen next, though. Some people think we’re economically headed towards a cliff. Some people can’t believe the legislators would not come to an agreement before the deadline hits. I’m of the opinion that we can’t put anything past these rascals.
Are you ready to buy a home? We can’t do anything about the government shutdown, but we do have MLS listings search that you can use to find your dream house.