As predicted, the government shutdown has impacted the housing sector on a national level. Of particular concern, however, are the implications this may have on the mortgage approval process. Mortgage applications have stalled, due largely in part to the inactivity of the Internal Revenue Service (IRS). As a result, applications for government mortgages have dropped to a six-year low. Analysts familiar with the market suggest that the current decline will continue for the foreseeable future, as negotiations to end the shutdown continue to be averted.
According to a survey conducted by the Mortgage Bankers Association (MBA), a 3% rise in refinances increased the rate of mortgage applications by 0.3% over the previous week. The upward trend would be encouraging if it were not supported by the prospects of homeowners choosing to refinance. Conversely, traditional mortgage applications used to purchase a home experienced a five percent drop.
The weekly decline in mortgage applications may be attributed to the government shutdown. However, the impact appears to be greater than originally anticipated. While the Federal Housing Administration (FHA), the entity responsible for insuring low downpayment loans, is predominantly in tact, a subsequent program from the U.S. Department of Agriculture has been rendered irrelevant in the wake of the shutdown.
An automated system still facilitates the FHA’s ability to process a significant amount of loans. However, those that require a more in-depth approach are subjected to delays. Much like the Veterans Administration program, complicated loans are currently taking much longer to process.
“The government shutdown had a notable impact on the mortgage market last week. Purchase applications for government programs dropped by more than 7 percent over the week to their lowest level since December 2007, and the government share of purchase applications dropped to its lowest level in almost three years,” said Mike Fratantoni, MBA’s vice president of research and economics. “FHA lenders with delegated authority have been able to continue, but those that rely on the regional homeownership centers have not. Additionally, HUD staff at headquarters are generally furloughed and not able to answer questions.”
The government shutdown could not have come at a worse time for the housing sector. The first half of 2013 placed us on a path to recovery that was slow, but sustainable. However, the recent transition into fall, in association with the shutdown has seen home sales drop. This is due, largely in part, to the increase in mortgage rates, but the shutdown has had a noticeable impact as well. Mortgage applications to purchase a home are now down over one percent from a year ago, while refinance applications are down 58 percent from a year ago.
These factors have contributed to a noticeable decline in homes sales over the past few weeks.
“After a really strong September, we too are experiencing a dramatic drop in foot traffic. We had a huge event this weekend at a community in Upper Marlboro, Md., along with Ryan Homes and NVHomes, and it was a real dud. I would estimate that our traffic is down by 50 percent in October,” said Stephan Paul of Maryland-based Mid-Atlantic Builders.