The shutdown at USDAs rural development loan program has cost Matthew and… (Courtesy of Matthew Green/Courtesy…)
Beginning next week, thousands of home buyers will be unable to get approvals for their mortgages because of the government shutdown, potentially undercutting the nation’s resurgent housing market.
Without paperwork from the Internal Revenue Service, the Social Security Administration and in many cases the Federal Housing Administration, banks and other mortgage lenders will be less willing to make loans, if they can make them at all. For instance, lenders rely on the IRS to confirm borrowers’ income and on Social Security to confirm their identity.
Every day that government offices remain shuttered will delay an ever-larger fraction of mortgage closings, industry leaders say, jeopardizing mortgage and interest-rate approvals and spooking sellers. About 15,000 new home mortgages and 18,000 refinancings on average are completed across the country each day.
On Friday, House Republicans continued to insist on changes to President Obama’s health-care program as a condition for funding the government. But with attention on Capitol Hill shifting to an Oct. 17 debt-ceiling deadline, there was no end in sight to the government shutdown, nor relief for prospective home buyers.
“Most people don’t really think about, ‘Well my loan is going to be underwritten by a federal agency,’ ” said Marj Rosner, vice president and sales manager at Long & Foster, a real estate firm. “But the government has a huge imprint here.”
Major lenders are scrambling to figure out whether they can risk making some loans without the federal paperwork and assessing whether they should require additional documentation from borrowers because the IRS has no one working who can verify income.
Many mortgages were able to close as scheduled this week because the paperwork was completed before federal employees were furloughed, but some home loans have already been frozen.
“The problem is going to grow in magnitude every day this shutdown goes on, because lenders’ liability is at risk,” David Stevens, chief executive of the Mortgage Bankers Association and former head of the FHA, said after a conference call Friday with heads of a dozen banks.
Nor will the problem disappear as soon as the government reopens.
“Even if this were to get resolved in a week, you’ve got an enormous backlog,” said Eric D. Gates, president of Apex Home Loans in Rockville. “It’s going to double or triple the effects in terms of delays.”
The approval of mortgage applications requires several interactions with the federal government that many home buyers may not know about. Lenders have become much more meticulous about following federal rules after the housing crisis that began in 2007, and are now more thorough in verifying the information on loan applications. These concerns were far less common when the government last shut down in 1995.
“The need for document checks and quality control just didn’t exist,” Stevens said. “Today, we’re in a world of huge risk and regulatory requirements.”
Among the obstacles, it is furloughs at the IRS that could have the widest impact. Lenders routinely file a form with the IRS asking for a copy of a borrower’s tax returns. The purpose is to make sure that the buyer provided accurate income information.
But the IRS sent most of its employees home Tuesday when Congress failed to agree on a budget, including those that process what are called tax-
Lenders also rely on the Social Security agency to verify borrowers’ Social Security numbers as a way of confirming their identity. These checks are done automatically, but the Web site that provides the information is down.
At the FHA, which plays a crucial role in the housing market by insuring loans with low down payments for first-time home buyers, the full-time staff of 3,000 is down to 64, and there are only 30 employees responsible for signing off on mortgage insurance for single-family homes. While large banks have the resources to approve lenders for FHA-backed loans, smaller lenders rely on the agency itself to do this.
About 25 percent of home purchases are made with mortgages backed by the FHA, as are 15 percent of all mortgages, including refinancings.
An additional 10 percent of home loans are guaranteed by the Department of Veterans Affairs, which still has a full staff approving mortgages for veterans. But the Department of Agriculture, which backs less than 5 percent of mortgages, has canceled new loans and guarantees in its program for buyers in rural areas.
The shutdown of Agriculture’s Rural Development loan programs has cost Matthew Green the starter house he has been waiting to buy since April, when his real estate agent showed him a three-bedroom split-level on an acre in Warrenton that was in foreclosure.
Green, 28, a mechanic at Pohanka Chevrolet in Chantilly, was approved in late August for a $210,000 loan. The next step was getting the government to sign off so he didn’t have to make a down payment.