July 20, 2011
California Real Estate
Government Shutdown and the Impact on Mortgages
In the wake of news stories that the US will face a government shutdown and default on its outstanding loans if a debt ceiling agreement isn’t reached, many people may be wondering what the impact would be to the mortgage industry and closings.
The last time we went through a government shutdown in 1995, it was a pain, but not a panic. If a shutdown were to occur again, mortgage expert Linda Davidson points out the following top six areas that could be impacted:
1. FHA Case Numbers: For each FHA loan, we are required to order a FHA case number. This number is generated before an appraisal can even be ordered. With a shutdown, we may not be able to order case numbers. Because of this, it is critical to let us know if there is a contract executed on any loan, so that our office can go ahead and order a case number without risking the loan being on hold during a shutdown. Note: with the new FHA guidelines, a contract must be executed before a case number can be ordered.
The ability to close FHA loans is questionable, depending if HUD keeps its website running to obtain FHA case numbers and CAIVRS. During the November 1995 shutdown, case numbers could not be obtained, but this was prior to the internet and was a manual process. The shutdown in 1995 mainly caused a delay rather than a drop in FHA loan origination. But if lenders decide to stop accepting FHA applications, it could be a problem. I think we may see delays but not a complete shutdown of the FHA.
2. 4506 IRS Transcripts: Each loan requires the verification of at least one tax return by the IRS to verify the numbers that each customer presents on their tax returns. During a shutdown, this process would be delayed as the IRS wouldn’t be at work to verify the transcripts.
3. Verifying Employment of a Government Employee: We are required to verify the employment of each customer. If the customer is a federal government employee, we would be unable to verify his or her employment during a shutdown.
4. FEMA: Homes in a Flood Zone: Homes that are determined to be in a flood zone would not be able to close as flood insurance could not be obtained.
5. USDA: During a shutdown, the USDA office would be closed because they have government underwriters that insure behind the lender. With a shutdown, we would see delays with all USDA loans.
6. VA: Like the FHA, the disruption is possible - but not absolute - during a shutdown. This would all depend on if they continued to allow their website to function. A disruption would cause delays in VA appraisals and the issuing of certificates of eligibility. If the website was closed during a shutdown, we would see delays in all VA loans.