How the Government Shut Down will affect Mortgage Loans

A number of you have asked me the following question:  “How will this government shut down affect  mortgage loans and our clients?”

·        The government’s fiscal year runs from October 1 to September 30.  Every year – Congress has to pass the spending bills that fund the government.  If they don’t pass those spending bills – the government can’t spend any dough.  Who says Congress has to approve these spending bills before the government spends money?  The Constitution.

·        Why won’t Congress sign next year’s spending bill?  It’s a big debate over the new health care law.

·        Hmmm.  Lots of things depend on government spending.  Will air traffic controllers get laid off?  What about the men and women in our armed forces?  About 2.5 million government employees will be considered “essential.”  Those people will keep on working.  Air traffic controllers and military are in that category.  But, about 800,000 employees will be considered “non-essential.”  They get furloughed.

·        Will this affect the economy?  Perhaps.  If it only lasts a week or so – probably not.  If it goes on longer, it could definitely have an effect on the economy – especially because we’re in a pretty fragile recovery.

·        How will this affect loans?  In the short run – it won’t affect us much.  In the longer run (beyond 10 days) it will start to have a more serious effect:

o   FHA

§  We’ll still be able to write FHA loans if the spending bill isn’t passed.

§  We will still be able to get an FHA Case Number from FHA.   FHA Total Scorecard will still be available.

o   VA

§  We’ll still be able to write VA loans if the spending bill isn’t passed.

§  We’ll still be able to obtain Certificates of Eligibility online

o   Fannie and Freddie

§  Both of these entities won’t be directly affected.  We’ll still be able to Register and underwrite conventional loans.

o   Sounds like we won’t be affected all – that’s great news.  What’s the problem then?

§  Some things won’t work if Congress doesn’t pass the spending bill:

·        IRS – they will still collect our taxes, BUT, they won’t be processing any forms – like the 4506t.  It’s possible that, without the tax transcripts, some processing could be delayed.

·        Social Security Administration – lenders often rely on the SSA to verify social security numbers.  This function could be delayed.

·        FEMA (Flood Insurance) – the ability to get new policies could be delayed.  This could affect purchases if the shutdown goes on for a while.  Again, it will have very little effect if it only occurs for a few days.

·        What about interest rates?  If the government stops paying some of its bills – won’t interest rates go way up?

o   Interestingly, at least in the short run – probably not.  Why?  Because nobody believes the US Government won’t ultimately pay back bond holders (that fight is coming when the borrowing limit needs to be raised on October 17^th).  But, because this game of chicken that Congress is playing with themselves will potentially damage the economy – the biggest losers if this goes on for a while would be individual companies and people like us.  So, people who think this will go on for a while are moving money out of stocks and putting them into US Treasury bonds.  Weirdly, the government saying they won’t pay their debts for a while could actually push rates lower.  BUT – before a loan officer gets super excited and tells his/her clients to float, consider that things could get really messy if this goes on for a while and nobody knows how that will play out.

  

So that’s it for now.  As I’ve mentioned, things could get more complicated if this lasts for a while.  We’ll certainly provide more updates in the days to come.