As the government continues to experience internal turmoil, individual municipalities throughout the United States will be impacted by the reported impasse. With the epicenter of the recent shutdown in Washington, the wake of ramifications will undoubtedly affect the entire housing sector on a national level. Subsequently, the absence of a fully functioning government may impede the progression we are currently witnessing in the housing sector. The already tight mortgage market may become increasingly more prohibitive.
“This is going to be very disruptive to the mortgage industry and pretty much result in a freeze of the pipeline,” said Craig Strent, CEO of Bethesda, Md.-based Apex Home Loans. “New loans can be taken, but without IRS and Social Security number verifications, [they] will not be able to proceed to closing.”
The lingering repercussions of the recent bubble crisis have forced lenders to reevaluate their evaluation process. After sustaining significant losses, servicers are becoming more meticulous than ever. As a result, borrower applications have been subjected to much stricter checks than in recent history. It has become common practice to verify tax returns as a quality control measure.
However, the recent stagnation of the U.S. government has seemingly rendered the IRS irrelevant, along with the recovery. With the IRS closed, because of the politics taking place in Washington, tax return transcripts may not be processed, potentially threatening to stall all loan applications.
The recent government shutdown has also impacted the Federal Housing Administration (FHA). While the department remains open, staff numbers have been significantly reduced. The FHA represents approximately 15 percent of the entire mortgage market and prolonged inactivity could cause severe consequences in the housing sector.
“The FHA program can weather a shutdown as long as it doesn’t last too long,” said Guy Cecala of Inside Mortgage Finance. “But a shutdown could also seriously impact FHA’s ability to police lenders and loan quality.”
Perhaps even more concerning, however, is the shutdown’s ability to affect mortgage refinances as well. Those relying on rate locks may be subjected to costly extension fees. “What could happen is that our customers could be put in a hold status and then subject to interest rate gyrations that are very likely to occur between the time a government shuts down and reopens,” said David Zugheri of Houston-based Envoy Mortgage.
Analysts believe that the government shutdown will only have a minimal effect on the housing sector if it is short-lived. However, the repercussions of uncertainty may have a significant impact, especially in light of the recent crisis. Homebuyers that have finally gained the courage to actively participate in the market may be scared of be the recent shutdown.
“It certainly won’t help housing. Among other things, it is likely to spook would-be homebuyers,” said Cecala.
Due to the importance of consumer confidence, it is critical that the government gets back on track. Prolonged absence can only serve to hurt the economy.
“Some home-buying consumers are reluctant to buy because of the uncertainty,” said Brad Hunter, chief economist at Metrostudy. “They see the factions in Congress as ‘daring’ each other, with extremely high stakes. People are not especially comfortable making the biggest investment of their life when the government seems to be unable to solve important problems.”