By now, most people know that the Federal government’s finances don’t run on a standard calendar year, like most companies and families. Each year, the start of the government’s fiscal year begins October 1. (Starting in 1842, the fiscal year began July 1, but in 1974 it was moved to October 1 to give lawmakers more time to finalize budget decisions after their summer recess.) This is the time of year (every year, it seems) when Congress only has a few weeks to avoid a government shutdown. But both parties always seem to be a long way from agreeing on a stopgap spending bill to keep federal workers on the job. Lenders and vendors should be aware of certain things.
Lawmakers need to approve legislation by September 30, when a current funding measure runs out, ahead of the start of the next fiscal year on October 1. Republicans and Democrats will, no doubt, pass a continuing resolution since there is not enough time to approve all 12 appropriation bills. If lawmakers are unable to beat the deadline, which never changes, a partial government shutdown will begin on Wednesday, October 1.
Lenders should know that a shutdown would not halt federal law enforcement operations, which have ramped up during the surge against crime in Washington, D.C. But federal workers considered nonessential would likely be furloughed, so they would not work and would not get paid (although there is back pay to be received later). This could include many federal employees involved in residential and commercial lending. Social Security, Medicare, and Medicaid benefits would still be processed. Systems including health programs, Social Security and Medicare, SNAP benefits, Food and Drug Administration inspections and small business loans would be affected. Most IRS services will pause.
The Mortgage Bankers Association created a member guide in late 2024 that outlines the potential impacts to single-family and multifamily government lending programs. “…A shutdown would necessitate a furlough of certain federal employees and significant curtailment of certain operations requiring agency staff intervention or action at the Department of Housing and Urban Development, Veterans Affairs, and the Department of Agriculture. National Flood Insurance Program (NFIP) authorities are also scheduled to expire…”
If the past is any indication, these shutdowns are more show than substance and usually have little to no economic effect beyond pushing some growth from one quarter to the next. The IRS didn’t send tax transcripts, which delayed some closings. In 2018-2019, the last major shut down, many, if not most, lenders temporarily suspended the requirement for Tax Transcripts. Once the shutdown ended, lenders obtained the transcripts after purchase for impacted loans. If issues were discovered upon receipt of the transcripts, loans may be subject to repurchase.
In general, lenders continued to require a signed 4506-T in accordance with program guidelines. Investors sent out notes to the effect of, “We will continue business as usual and proceed with review of closed loan packages submitted subject to the following guidelines, unless we have communicated otherwise: All required documentation and verifications must be present at the time the closed loan file is delivered. We will not purchase loans without all required documentation.”
Lenders are often caught in-between trying to help their borrowers to the best of their ability and not being able to receive information or even contact government agencies impacted by the partial or full shut down. During the last full shutdown, Ginnie Mae issued a release of information regarding its operations during a lapse in government funding, as did Freddie Mac and Fannie Mae.
The 2018-2019 Federal Government shutdown had no direct impact on Freddie Mac. It continued normal operations without interruption during the shutdown. Borrowers who were impacted by the shutdown were eligible for relief options, including forbearance, as detailed in Chapter 9203 of the Freddie Mac Single-Family Seller/Servicer Guide. Freddie Mac published Bulletin 2019-1 to provide temporary selling and servicing requirements to assist borrowers who may have been impacted by the federal government shutdown. These temporary requirements are effective immediately and will automatically terminate once the federal government resumes full operations.
Fannie Mae issued a Lender Letter to provide temporary guidance on selling and servicing policies that may be impacted by the federal government shutdown that began on December 22, 2018. (The letter has been removed).
During the last shutdown, the FHA issued a bulletin in advance which provided additional clarity for HUD mortgagees regarding which systems were operational, and which FHA customer support operations were functional, though limited. The FHA’s reverse lending program was put on hold along with USDA mortgage insurance endorsements. During the last lengthy shutdown and the lapse in appropriations, the Federal Housing Administration’s (FHA) Office of Single-Family Housing and its mortgage insurance program operated with limited services.
As was the case in previous shutdowns, under a lapse in funding, FHA’s actions and decisions about which operations continue, or not, are governed by the Constitution, statutory provisions, court opinions, and Department of Justice (DOJ) opinions, which provide the legal framework for how funding gaps and shutdowns have occurred in recent decades. In the past, full descriptions and details were found in the Department of Housing and Urban Development’s (HUD) Contingency Plan for Possible Lapse in Appropriations document posted on HUD.gov. These have now been removed but are expected to be posted should an actual shutdown occur.
During the previous shutdown, during a lapse in government funding, Ginnie Mae continued to remit timely payment of principal and interest to investors. There was no disruption of essential functions, including the granting of commitment authority and support for continued issuance of Ginnie Mae-guaranteed Mortgage-Backed Securities (MBS) and Real Estate Mortgage Investment Conduits (REMICs).
If a shutdown occurs in 2025, for USDA-approved lenders it may be helpful to look back. In late 2018, the USDA announced it would not issue commitments during a partial government shutdown, despite rumors of companies funding these loans regardless. Rural Housing Service (RHS) loans that have a valid Conditional Commitment in effect as of the date of closing are eligible for closing/funding.
During the last shutdown, the Federal Emergency Management Agency (FEMA) announced that the NFIP program will resume the sale, renewal, and monetary endorsements for flood insurance policies.
Whether or not these same 2018 and 2019 policy and procedure changes occur here in the autumn of 2025 remains to be seen. But it is always good to be prepared. Lenders should be in contact with their investor and aggregator partners and do their best to keep their staff fully prepared so that borrowers can be assisted. The old adage, “Hope for the best but plan for the worst” may come in handy in the coming weeks.
Would you like to speak to STRATMOR about our services? Contact us today!
Let us light up your strategy discussions.
Feel free to reach out with any questions or needs we might be able to help with.
