It may not be the end of the world, but it is the end of some deals thanks to the government shutdown. Nearly 95% of the United States Department of Housing and Urban Development (HUD) and 88% of the IRS aren’t working during the partial government shutdown. About 380,000 federal employees have been furloughed and an additional 420,000 are working without pay.
This has been the longest shutdown in United States history and as the fight between the president and democrats drags on, there are countless people and businesses beginning to feel the strain. In addition to lost wages and missed mortgage payments by federal employees, there are several ways in which the shutdown is affecting the real estate industry. If you haven’t had a deal stall or completely sputter out, the chances increase as each day without resolution passes. Here are some of the problems that have begun to impact homebuyers, title companies, real estate agents, and lenders.
Homebuying power is being hampered
Federal employees are more likely to back out of home purchases or stop the homebuying process altogether since securing a loan will be more difficult right now. While hundreds of thousands of federal employees are obviously nervous about their finances there are also countless companies unable to meet payroll and individual contractors with invoices pending payment because their biggest customer - the federal government - has stopped paying their bills.
There are no solid statistics on just how many private contractors exist because the government doesn’t keep records on them, and the companies are reticent about their contract work for competitive reasons, so the impact on these workers will never be fully known. Paul Light, a professor of public service at NYU, estimates the overall federal contractor workforce at 4 million, almost double the number of federal civilian workers. Needless to say, federal workers aren’t the only ones whose homebuying power has been hampered by the shutdown.
The frustration and stress of being furloughed or working without pay will take a toll on these workers, but you can help. You might not be able to help them with their down payments or mortgages, but payitfurloughed.com will let you at least buy them some liquid therapy.
Government agencies and programs are delayed or suspended
The U.S. Department of Housing and Urban Development (HUD) is among nine federal departments that don’t have funding under a partial government shutdown. That means several government agencies and programs that provide home and property loan or renter assistance are delayed in processing applications or completely suspended due to short staffing.
The Federal Housing Administration’s loan program gives a proverbial foot in the door of homeownership to borrowers that lenders would normally pass up for a mortgage. Yet, as the shutdown continues, those would be homebuyers are being left out in the cold… at least for longer than usually. Single-family FHA loans are being funded during the shutdown, but those working with borrowers depending on one can expect delays.
The FHA will not be endorsing home equity conversion mortgages (known as reverse mortgages) and FHA Title I loans (financing for property improvements and renovations) during the shutdown. The FHA will also not be making any new commitment under the Mult-Family program.
The Department of Veterans Affairs will continue to process VA loans.
If you live in a region, like Texas, that relies heavily on low-interest loans for would-homeowners, you’ll probably see less offers. The U.S. Department of Agriculture has completely halted processing applications and approving loans, which means thousands of people in rural areas are losing access to financing. According to USDA data, the department guaranteed about 10,000 single-family loans every month in the past fiscal year ending in September. It’s also negatively impacting nonprofit developers who depend on the department for financing projects to build affordable housing options in rural markets.
As private companies, Fannie Mae and Freddie Mac aren’t directly impacted by the shutdown. However, as government-sponsored enterprises, they both facilitate conventional loans. These mortgages are still being processed, but in order for a lender to close on a deal an important IRS form is needed to verify income.
For Freddie Mac, all borrowers must sign a 4506T form prior to closing, but the request doesn’t have to be processed before the closing. Fannie Mae also requires this form to be completed unless the borrower’s income can be confirmed through their proprietary Desktop Underwriter verification system.
Lenders take on more risks
Fortunately, a few days after the shutdown on December 22nd, the Trump administration declared the 4506-T form “essential” after lobbying efforts from mortgage officials. Despite what many people are calling a favor for the industry, there is still a backlog of mortgage applications to get through.
Additionally, the FHA has stopped assisting financial institutions in underwriting loans. Not all lenders have access to the FHA’s Desktop Underwriter system, especially smaller banks and credit unions, which means they are unable to process and underwrite government-backed and conventional loans through the usual Fannie Mae guidelines. Countless lenders will have to choose between backing out of a deal or gamble on originating a loan without completing due diligence.
Self-employed borrowers might have a more difficult time finding a lender since access to the federal income tax transcripts is limited. However, some lenders may be willing to accept signed tax returns in lieu of the transcripts. And, of course, federal employees will have a harder time verifying their employment for a loan during the shutdown. In response to the prolonged shutdown, Fannie Mae and Freddie Mac release new guidelines on how lenders may originate loans. This provides more flexibility in obtaining verbal verification of employment and older paystubs. These new requirements are temporary and will expire as soon as the government resumes normal operations.
Any scheduled closings involving a direct loan from the U.S. Department of Agriculture will be canceled while those involving a guaranteed loan by another entity without the guarantee previously issued will be closed at the lender’s own risk.
Carlos Perez, Fannie Mae's senior vice president, stated, "We appreciate the understanding and consideration that lenders extend to borrowers coping with the hardships imposed by the shutdown. We will continue to monitor the situation and may provide additional guidance if the shutdown continues.”
Settlement agents face more frustrations
While the administration may have done the mortgage industry a favor by declaring the 4506-T form part of “essential” personnel duties, there are still other requests and documents being ignored. That means if you’re working on a real estate closing with a tax lien that needs to be released or requires a payoff letter, you’re not likely to get far on the deal. ALTA reports that the shutdown is forcing deals involving IRS liens to cancel. Nick Hacker, president and CEO of North Dakota Guaranty & Title commented that one underwriter advised his company against closing deals with IRS liens.
The best case scenario is that there will be major delays should you require any assistance from the IRS. These tasks aren’t a priority right now and the IRS shutdown plan “limits the amount of time that collection staff spends on the phones or responding to correspondence.”
Since HUD is also not operating at full capacity, any encumbrances on a property stemming from a loan by any of its departments will also be almost impossible to cure even with proof of payment. The employees working at the department aren’t allowed to take your call or email about sending a release to the county recorder. This will affect both title curative and post-closing tasks for settlement agents.
Those files that you closed on a month or two ago requiring a release of a HUD backed loan will require extra scrutiny once the government is up and running again. The contracted consulting and management companies that normally handle these communications and requests are currently unable to help with any of these issues.
Should following up with past closings you put behind you months ago while you’re struggling to get a new deal closed feel overwhelming, here are three reason to consider adding payoff tracking to your title company or real estate law firm’s process.
The shutdown isn’t going to last forever, but it’ll have a broader impact on overall homebuying psychology. While most deals will eventually get done despite the delays, without a definitive date of compromise, uncertainty about the economic stability of the country will grow. The longer it lasts, the more private sector employees may question purchasing a home as well. As we move into the spring fever buying season, real estate professionals working in markets that rely on government and contractor workers to move inventory will start to feel the effects of the shutdown too. Perhaps we can commiserate over one of those free beers.
Do you work in a market with lots of government employees? Have you begun to see a change in homebuyers in your area related to worry over the shutdown? Tell us about your experiences in the comments.