3 Facts You Should Know about the Government Shutdown
Do you have questions about how the government shutdown will affect the mortgage industry? You’re not alone. MortgageDocs has questions too. After doing some serious digging, we’ve found some credible and helpful information about what our company, our clients and our notaries can expect from the government shutdown.
We hope some of this information answers your questions about FHA loans and the current state of lending in general.
Note Just to be clear, this information was gathered and written by MortgageDocs using multiple sources. There are some opinions included in the article as well. If you would like to go directly to the source to get additional information, please refer to the link at the bottom of each section.
1) FHA Loans WILL be affected, but not completely discontinued.
There has been a lot of conflicting information about whether FHA loans will be halted during the federal shutdown. Even credible news agencies are confused. You can see this by looking through some of our Facebook posts- last week we posted that FHA loans would stop being funded, but as it turns out, the news agency that wrote the story we shared was mistaken and retracted their article the next day explaining that FHA loans would indeed continue to be funded. The fact that media outlets are confused makes it even more difficult for the general population to understand the impact of the shutdown on the mortgage industry.
Here’s the real deal (at least what current information supports): The Federal Housing Administration (FHA) will continue to fund and underwrite loans, but not enough to meet current demand – BUT the FHA is not the primary underwriter for VA and FHA loans. Private mortgage lenders, not governmental agencies, process and underwrite the majority of FHA and VA loans.
These private lenders have what is called “delegated authority” and can process loans independent of the Department of Housing and Urban Development (HUD) and FHA, thus are not interrupted by the government slowdown. These designated lenders do about 80% of the VA and FHA loan volume. Designated lenders can also get FHA case numbers through the usual FHA online system. There are always exceptions to this, but the simple answer is NO, FHA and VA loans will continue to be funded and the majority will see little to no change in processing.
If you are interested in getting more specifics on this topic, please refer to this article from the Huffington Post
Also reference AOL Realestate’s information here
2) Loan funding may be slower than normal because IRS services are severely limited.
When funding a loan, lenders are mandated to verify at least one year of borrower income using the borrower’s IRS tax returns. The returns must be verified with the IRS through a 4506 Transcript. With the IRS staff furloughed, borrower information cannot be verified.
Inconsistent reports of the real impact: Even though at first glance the inability to verify income with the IRS seems dire, on October 7th Forbes said that in practice, the income verification mandate does not impact lenders selling loans directly to Fannie Mae, so many large lenders will not see a disruption in mortgage funding and approval.
The National Association of Realtors (NAR) is a little less sure of the impact, and as of October 3rd they wrote that many loan originators are adopting revised policies during the government shutdown and allowing income verification to follow the processing and closing. According to NAR, Fannie Mae and Freddie Mac have adopted relaxed provisions allowing closings to continue but loans are still subject to income verification.
It seems the lenders who will be most impacted by the IRS closure will be smaller lenders selling adjustable rate mortgages to investors.
Read Forbes’ coverage on this topic here
Learn how different lenders are handling this situation from CBS News here
Here’s what the National Association of Realtors think
3) Expect Lower Mortgage Rates.
Mortgage rates are directly linked to the direction of the economy. If banks and lenders feel that the economy is weakening, or that demand for loans is decreasing, they typically lower interest rates to spur demand.
The government shutdown has made many potential homeowners weary of making big buying decisions and that includes mortgages. Mortgage rates have already lowered slightly from their highs earlier this summer – partly due to the Federal Reserve’s decision to continue buying bonds through next year. Hopefully this temporary government shutdown doesn’t significantly slow the positive momentum the housing market has gained over the last year, but it is too soon to tell any long-term effects.
Bottom line: Lower interest rates are good- in theory. They attract homeowners to purchase mortgages and could potentially help increase the number of mortgage applications processed- and that means more work for notaries. During the temporary shutdown you may see less work, but after the shutdown is over and the lower mortgage rates continue, we may very well see more mortgage applications than we have in the last few months of summer.
Read more about this topic in Forbes here
We hope that this information answers some of your questions and gives you the tools you need to answer questions that we didn’t address. If you are curious about any of these topics and would like more information, or have questions about topics not covered related to the shutdown, feel free to send your questions to us via our contact form here.