5 ways a government shutdown affects mortgage lending

Editor's Note (Dec. 24, 2018): The federal government has shut down for the third time in 2018. The most recent shutdown is only a partial closure, affecting nine of 15 cabinet-level agencies, including the Department of Housing and Urban Development. But it may prove more difficult to resolve, given the year-end holidays and the Jan. 3 start of the new Congress, which will see Democrats take control of the House of Representatives and Republicans gaining two seats to maintain control of the Senate.

Here's a look back at how previous government shutdowns affected operations at the various agencies that play critical roles in the mortgage industry.

Are you a mortgage lender or servicer experiencing negative consequences from the shutdown? Tell us about it on Twitter, Facebook and LinkedIn or email Editor in Chief Austin Kilgore.

The mortgage industry's fortunes are closely tied to a number of public agencies, and lenders will likely see originations slow if the political impasse in Washington shuts the government down at midnight.

But the severity of its impact on the mortgage market will depend on how long it lasts.

The Department of Housing and Urban Development does "not expect the impact on the housing market to be significant, as long as the shutdown is brief," according to a section of its website addressing the potential impacts of a shutdown.

A shutdown in 2013 continued for 16 days, and the Federal Housing Administration continued to insure single-family loans for the duration.

However, "with each day the shutdown continues, we can expect an increase in the impacts on potential homeowners, home sellers and the entire housing market."

"A protracted shutdown could see a decline in home sales, reversing the trend toward a strengthening market we've been seeing," according to HUD.

Most endorsements of certain Federal Housing Administration loan products will continue but could slow as a result of the shutdown. However, certain specialized products will not be available due to a lack of statutory authority to continue originating them.

Whether the shutdown will delay loans in the pipeline from closing will depend on whether other aspects of the government shutdown affect lenders' ability to verify borrower information and continue processing mortgages.

In addition to impacting the FHA, the shutdown could affect the mortgage industry by disrupting some functions of the Internal Revenue Service and the U.S. Department of Agriculture that affect lending, as a similar one in 2013 did.

But other government-related entities with close ties to the mortgage industry came through in 2013 with little disruption or no disruption to operations, and are expected to again.

Here's a look at what will happen at five federal agencies that support the mortgage industry if the government shuts down.

The Federal Housing Administration will continue to endorse single-family loans with the exception of reverse mortgages and Title 1 loans, according to the Department of Housing and Urban Development. But staffing limitations could extend processing times.

The FHA also will continue lender insurance approvals unless it runs out of commitment authority.

Ginnie Mae will continue to operate and has multiyear commitment authority that it expects the Office of Management and Budget to approve and have in place ahead of the shutdown. Also, "Ginnie Mae contractors are paid from Ginnie Mae reserves under a permanent indefinite appropriation, so there will not be a break in contractor services on essential functions," according to HUD.

The biggest hassle for the mortgage industry in 2013 was that the Internal Revenue Service stopped processing 4506-T requests.

The IRS declined comment on any plans for how it will handle the shutdown and requests for tax transcripts used to verify borrowers' income this year, but if it plays out like last time, what some lenders will do is save the borrower's 4506-T authorization in the loan file and postpone verification.

But other lenders may refuse to close loans without a transcript and some investors might not want to purchase loans unless they have one.

As part of the U.S Department of Agriculture, the Rural Housing Service is expected to be impacted by the shutdown and single-family loan processing will come to halt.

"No new rural housing loans or guarantees would be issued, which would result in a setback in construction start-up, as well as a potentially costly inconvenience to buyers and sellers depending on a single family housing loan or guaranteed loan closing. A more permanent interruption in the program would cause a substantial reduction in housing available in rural areas relative to population," according to the USDA website.

"While lenders are permitted to close loans with outstanding commitments, USDA will also be unable to guarantee them until staff return to work," according to the agency.

Fannie Mae and Freddie Mac are quasi-governmental agencies, so the shutdown didn't affect them last time there was a government shutdown in 2013 and it is not expected to this time either.

"We're not part of the government and will be open for business," said Katie Penote, manager of corporate and financial communications at Fannie Mae.

"Freddie Mac will continue normal operations without interruption during a temporary federal government shutdown. Our systems and business functions will be open as usual for all selling and servicing functions. Freddie Mac is not a government agency and therefore not impacted by the shutdown," said Lisa Gagnon, a spokesperson at Freddie Mac.

But other delays related to the shutdown could delay lenders' ability to originate and reduce the volume of mortgages delivered to the two government-sponsored enterprises.

The Department of Veterans Affairs has determined that housing is an "essential service" for military veterans and will not be affected by the shutdown.

As with Fannie and Freddie, other delays related to the shutdown could delay lenders' ability to originate and reduce the volume of mortgages delivered to the two government-sponsored enterprises.

But by all accounts VA originations continued running fairly smoothly during the last government shutdown in 2013.