A U.S. government shutdown will immediately slow approval of thousands of mortgages. If it lasts more than a week, it threatens housing and the broader economic recovery.
Congress forced the first partial government closure in 17 years after failing to pass a budget, meaning borrowers in the process of obtaining home loans could be delayed as lenders are blocked from verifying Social Security numbers and accessing Internal Revenue Service tax transcripts.
The process may also lengthen the wait for borrowers seeking approval for mortgages backed by the Federal Housing Administration because its fulltime staff is now less than a tenth of its normal size and the U.S. Department of Agriculture, which backs mortgages in rural areas, won’t take on new business during the shutdown.
“The last thing we need is anything that shakes the confidence in a softly recovering housing market,” David Stevens, chief executive officer of the Mortgage Bankers Association and former head of the FHA, said in a telephone interview. “If it’s a short-term shutdown, it’s a story about these employees put out of work. If it’s long term, it’s a broader story about the adverse impact to the economic recovery.”
The shutdown comes as construction and new housing sales are climbing back from the worst financial crisis since the Great Depression. Builders broke ground on residences at an annual pace of 891,000 in August, up from a low of 478,000 in April 2009 while still only about two-thirds of the last 20 years’ average rate, according to Commerce Department data compiled by Bloomberg.
Home prices, which have climbed 21 percent since hitting a post-recession low in March 2012, are still 21 percent below their June 2006 peak, according to the S&P/Case-Shiller index of property values in 20 cities.
The reductions were triggered after Congress failed to meet a budget deadline to keep the government open as Republicans sought to delay President Barack Obama’s Affordable Care Act, also known as Obamacare, triggering yesterday’s furloughs for 800,000 employees.
The impact will start “behind the scenes” and gradually move to the foreground if Congress doesn’t pass a budget, according to Bob Walters, chief economist at Quicken Loans Inc. The absence of federal workers who verify Social Security numbers and provide Internal Revenue Service tax records will begin delaying some loan approvals, he said. Many lenders use tax transcripts to confirm the returns that borrowers provide are valid.
“In the early days, very little impact,” Walters said in a telephone interview from Detroit. “But the longer it goes on, the more impact there’ll be.”
Kris Wilson, senior loan officer at Fairway Independent Mortgage, said the Madison, Wisconsin-based lender is planning to delay until after closing the requirement for a tax transcript in most cases. Other lenders may be more reluctant.
“It is a risk,” Wilson said. “But we are unwilling to disappoint customers in that way.”
Loans that conform to guidelines set by Fannie Mae and Freddie Mac won’t be affected directly by the shutdown, because the government-controlled mortgage aggregators fund operations through fees collected from private lenders, not taxpayers, according to Stan Humphries, Zillow Inc.’s chief economist.
The two mortgage finance companies are responsible for the majority of new loans while the FHA and U.S. Department of Veterans Affairs account for about one in four new mortgages. The U.S. Department of Agriculture, which offers low-down payment mortgages to rural borrowers, has canceled loan closings during the shutdown, according to its website.
A short-term disruption of some FHA loans “while certainly detrimental, shouldn’t have much long-term impact on either demand or housing affordability,” Humphries said in a Sept. 30 blog post.
Only 67 of the FHA’s 2,972 workers are working through the shutdown, including 29 employees dealing with loan endorsements and preservation of properties, said Department of Housing and Urban Development spokesman Jerry Brown. FHA is an arm of HUD.
During the shutdown, FHA won’t process “Title 1” manufactured housing and home-improvement loans and reverse mortgages, which allow borrowers age 62 or older to withdraw equity and repay it only when their homes are sold, according to the latest update to HUD’s contingency plan.
“There’s a skeleton crew,” he said in a telephone interview. “We still intend on processing FHA loans.”
The smaller staff will take longer to process loans with low down payments that need mortgage insurance, a sign-off required for lenders that don’t have so-called “direct endorsement” authority. About 20 percent of FHA loans would require such a manual review after the loans close.
“There would be a handful of people managing the whole country for the direct endorsement backlog and it will probably be very slow,” Stevens said.
A partial shutdown of the U.S. government lasting one week would probably shave 0.1 percentage point from economic growth, according to the median estimate of economists, with the costs accelerating if the closing persists.
Research firm IHS Inc. (IHS:US) estimates it will cost the U.S. at least $300 million a day in lost economic output at the start. While that’s a fraction of the country’s $15.7 trillion economy, the effects probably will grow over time as consumers and businesses defer purchases and expansion plans.
The furloughs will first affect spending in metro areas where federal employees make up more than 10 percent of the workforce, such as Washington; Virginia Beach, Virginia; Dayton, Ohio and Honolulu, according to Jed Kolko, chief economist for Trulia Inc. (TRLA:US), a real estate website.
“If the shutdown persists, local economies and housing demand could be hurt -- especially in markets where people depend more on federal paychecks,” he said in a Sept. 30 note. “At the other extreme, just 1 percent of local wages in New York and San Jose come from federal paychecks.”
Builders most at risk of slowing sales because they cater to buyers using FHA financing include D.R. Horton Inc., Lennar Corp. (LEN:US) and KB Home (KBH:US), according to Jay McCanless, an analyst with Sterne Agee & Leach Inc. in Nashville, Tennessee.
“Unless the shutdown turns into weeks rather than days, we do not expect a decrease in demand since the FHA stoppage should delay rather than cancel closings,” McCanless wrote in a Sept. 30 note.
D.R. Horton, the largest U.S. builder by revenue, rose 0.8 percent to $19.54 at the close of trading in in New York, as 10 of the 11 companies in an index of builders rose. The gauge has slumped 20 percent from a May peak after the Federal Reserve signaled it could start curbing stimulus measures.
HUD counseling for homeowners with payment difficulties won’t be directly affected by the shutdown, said Tom LaFleur, executive director of Pacific Community Services Inc., a government-approved counseling center in Pittsburg, California.
“Most HUD counseling agencies were grossly underfunded already,” LaFleur said in a telephone interview. “We got a $14,000 grant for a program that needed about $80,000. That’s typical.”
Funding won’t stop at federal construction projects, such as courthouses, military facilities, dams and levees, according to Brian Turmail, a spokesman for the Association of General Contractors of America, a trade organization based in Arlington, Virginia. Delays may occur if contractors can’t get answers for unforeseen questions or change orders in a project, and new contracts won’t be awarded, he said.
“We’re not huge fans of Obamacare, but we want to see the federal government proceed,” Turmail said.
A bigger concern for the economy than the shutdown would be Congress’s inability to raise the debt ceiling by Oct. 17, which could lead to a default on U.S. debt obligations. Mortgage rates would probably rise sharply, making homes unaffordable for many buyers, according to Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.
“All bets are off and the downside economic impact will be grave,” Gabriel said in a telephone interview. “All aspects of the debt markets would be adversely affected. It would have serious and egregious effects on the U.S. economy.”
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