Will a Government Shutdown Affect the Housing Industry?

The Obama administration warned yesterday that a government shutdown would undermine the economic recovery and limit FHA and VA government guaranteed mortgages during the peak home buying season.  Speaking in Philadelphia, President Obama also warned that the inability to strike a budget compromise might stall the process of selling one’s home.

A look a history provides insight as to what we can expect. During the last shutdown in 1995, HUD issued Mortgagee Letter 95-55 in which they addressed the 5 most asked questions posed by mortgage bankers, real estate agents, and other involved in the mortgage finance industry. Below are the questions and HUD’s response:

1- Is it necessary for a lender to obtain a case number tostart processing a FHA-insured mortgage?

No, but the lender should obtain a case number as soon as
possible.  A mortgage originated before a case number is
assigned does not invalidate the eventual assignment of the
case number or the appraisal (assuming the appraiser is
eligible to make appraisals for FHA mortgage insurance
purposes).  Further, it is not necessary to have a case
number to close a mortgage but obviously a valid case number
must have been obtained before the loan can be submitted for

2-May the lender close the mortgage without obtaining a Credit
Alert Interactive Voice Response System (CAIVRS)
authorization number?

Yes, but the lender does so at its own risk.  If it is
eventually determined that the borrower is not eligible due
to information reported through CAIVRS, then the mortgage
will not be endorsed.  Lenders should check CAIVRS at their
earliest convenience.

3-If the lender is unable to transmit the Upfront MIP during
the 15-day window, will there be a late fee imposed?

No, the Department has determined that mortgages closed
around the period of the shutdown will not incur a late fee
if the Upfront MIP is received within 25 days of closing.
However, this ten-day extension only applies to mortgages
closed during November of this year.

4-Will the shutdown result in a delay in obtaining the
Mortgage Insurance Certificate?

We have directed our local offices to allocate staff
resources to ensure that  backlogs in issuing endorsements
resulting from the shutdown are kept to a minimum.

5-Is FHA extending the 60-day endorsement submission

No, we do not believe it necessary to extend the 60-day
endorsement submission requirement.  However, we have
advised our local offices to be flexible if it has any
reason to believe that a particular loan file was submitted
late due to the shutdown when determining whether the
mortgage is eligible for endorsement as submitted or if a
payment history is required.

The ultimate impact on our industry will be dependent on how long a shut down lasts. It has been suggested that a 7-10 day shut down will have little impact. According to a spokesman, Wells Fargo “will continue originating and closing FHA and VA mortgages in the event of a short-term shutdown of the federal government.”

A prolonged shutdown might be a different story. Lenders are of the belief that FHA’s automated on line server will be operational during a shutdown allowing uninterrupted issuance of the approvals insuring the loans, but according to a HUD spokeswoman, “if the government shuts down the FHA’s system will be shut down completely. That means lenders won’t even be able to start the FHA approval process or push an existing loan file through the automated system.” Without case numbers, it will be impossible for lenders to order appraisals, resulting in new loans being stalled.

Other anticipated problems for lenders include obtaining tax transcripts, VOEs and paystubs for government employees, as well as difficulty in obtaining a qualified veteran’s certificate of eligibility.

Unfortunately, a line has been drawn in the sand. If it cannot be resolved by sometime tomorrow, the repercussions will go far beyond the housing industry. We are arguing over a budget that runs through September. It could take 3 months from approval for government agencies to analyze their budgets and start distributing the funds. What will be the impact on business and the American economy? It would make far more sense to agree to compromise and worry about how much and where to cut in next year’s budget.