Home Financing Despite the Partial ShutdownBy Rob Chrisman,
Rob Chrisman's Perspectives
There is lots of blame to go around and fingers being pointed as the partial shutdown of the federal government drags on. The mortgage industry is feeling the effects: Several federal agencies have suspended all but essential operations. Federal banking regulators — the Consumer Financial Protection Bureau, FDIC, Federal Reserve, and OCC — remain open, as their funding does not come from congressional appropriations.
This shutdown is causing financial problems for furloughed workers who can’t refinance their mortgages or buy homes because lenders can’t verify their income, and for 90 percent of IRS employees viewed as nonessential. And, the 800,000 unpaid federal employees aren’t the only ones running into problems.
Mortgage application numbers have been bouncing around, and borrowers who were sitting on the fence have taken advantage of the drop-in mortgage rates to lock in a loan (though furloughed workers can’t lock in those rates). Anyone relying on federal agencies to verify income taxes or obtain certain loan information from the FHA is in trouble: it remains mostly closed. Rural home loans guaranteed through the Department of Agriculture are on hold, too. Real estate agents have deals on hold, and many government contractors’ pay is on hold.
HUD is closed. In accord with the HUD Contingency Plan, the Federal Housing Authority’s Office of Single Family Housing will endorse new single-family loans, but not HECM (reverse mortgages) or Title I (property improvement) loans. The FHA is operating with reduced staffing. For FHA loans, the FHA recently sent out a letter stating that they will be operating at a limited capacity and that the services that remain available during the shutdown will have significant impacts to customer service and/or limited functionality. Overall, these limitations add up to significant FHA loan origination delays for government lenders that can’t get loans approved using FHA’s automated systems. For example, if a loan applicant’s credit history is too thin, a manual underwrite may be required, creating more of a delay. Condominium project approvals under that HUD Review and Approval Process will be unavailable.
Fortunately, the shutdown does not include employees who fund and process VA loans. The processing of VA loans is considered an essential function, and VA loans are being funded and closed. At the other end of the spectrum are USDA loans, which will simply not be processed during the shutdown and will be lost to loan originators despite rumors of some lenders doing them. Lenders that proceed with scheduled closings of single-family guaranteed loans where the guarantee was not issued before the shutdown do so at their own risk. Ginnie Mae will continue to make pass-through principal and interest payments to investors and perform other essential functions, such as granting commitment authority and supporting the issuance of guaranteed mortgage backed securities.
The Treasury Department restarted a program that had been sidelined by the partial government shutdown, allowing IRS clerks to collect paychecks as they process IRS income verification requests. (Supposedly the IRS started the program again by using fees paid by companies that provide the transcripts to lenders.)
Regulators have recommended that Fannie, Freddie, FHA/VA and USDA (Farm Service Agency and Rural Housing Services) should consider the immediate development and announcement of a loan modification/forbearance program for affected federal employees/contractors that would take the loans for such employees out of the normal delinquency, default, F/C cycle for an extended period.
Dr. Matt Lind, STRATMOR partner emeritus, writes, “Of the approximately 504 thousand home-owning government worker households, and assuming that roughly 75 percent have a mortgage, the number of households with a mortgage is 378,000 (75% x 504,000). These are the households that will, if the partial shutdown continues, eventually miss mortgage payments, move into default status and, after perhaps 4-6 months of delinquency, enter foreclosure unless Agencies institute a loan modification/forbearance program.
“With regard to the 378,000 home-owning government workers with a mortgage who pose a heightened foreclosure risk, I believe that they are not going to just stand still and watch their home go into foreclosure. Some will undoubtedly take temporary full or part-time jobs; some may actually get a new full-time job and quit their government job altogether; some may have family and friends willing to help them out financially for some period of time; and in two-income households, cutting back on expenses may tide them over. So, I don’t mean to suggest that there will be 378,000 foreclosures. But a prolonged shutdown would likely generate a significant amount.”
If you think this is bad, 2019 is expected to contain several initiatives and programs that the government must agree upon. If they don’t, well, there will be lots of inconveniences ahead of us. From the perspective of the U.S. economy, the longer the shutdown, the more uncertainty there is with borrowers, and with consumers around the nation. This creates a slow-down by itself, in theory leading to lower rates. But at what cost to potential borrowers?
STRATMOR’s clients are open for business but are keeping a wary eye on developments. Many have shifted borrowers to programs that are less dependent on agencies within the government impacted by the partial shutdown. And all are awaiting news of the end of this logjam.