Sad but true: when the government screeches to a halt, homeowners may feel the effects.
Government Shutdowns Impact Home Loans, Insurance, and Federal Aid
There’s a lot of news out there about what happens during a government shutdown. But we’re interested in how it could affect homeowners and those in the process of buying a home. For now, assume everything in here applies to the ongoing partial government shutdown of 2019 that started in December 2018; if we update this post to address future shutdowns, we’ll make note of that here.
There are several government services relevant to homeowners that could be impacted by a government shutdown. We’ll look at the following:
- Government-backed mortgage loans (FHA, USDA, and VA)
- Mortgage underwriting supported by Fannie Mae and Freddie Mac
- NFIP flood insurance
- FEMA disaster recovery aid
- HUD-backed home improvement loans
Effect of a Government Shutdown on Mortgage Loans
The federal government provides two main types of assistance for mortgages: loan insurance and actual mortgage loans. Both may be affected by the ongoing 2019 government shutdown.
FHA Mortgage Loans
The Federal Housing Authority (FHA) makes it easier for some first-time homebuyers to get a mortgage by offering mortgage insurance. An FHA-backed loan typically requires less money down than a standard loan. To mitigate the lender’s risk, the FHA supplies insurance on the loan (which the borrower pays for, typically wrapped into their monthly mortgage payments).
As of now:
- FHA-backed loans for single-family residences are still being financed.
- FHA home equity conversion mortgages (also called “reverse mortgages”) are NOT being financed.
- FHA Title I loans for home improvement projects are NOT being financed.
So if you’re looking for an FHA-backed mortgage to buy a home, you should still be able to secure it during the government shutdown.
There are two big caveats here, though: first, while the FHA is still operating, it is not currently fully staffed, so securing a loan may take more time than usual because backlogs are forming.
Second: there’s more to buying a home than securing a mortgage. Read on for how the shutdown might affect government branches responsible for mortgage-adjacent duties.
VA Mortgage Loans
The Department of Veterans Affairs (VA) also offers mortgage guarantees – in this case for those who have served or are serving in the military. As of this writing, VA-backed loans are still available to eligible borrowers.
As with FHA loans, though, system backlogs may mean these loans will take longer than usual to secure.
USDA Mortgage Loans
USDA loans, sponsored by the Department of Agriculture and available to low- and middle-income Americans in rural areas, are NOT being processed during the shutdown. While homebuyers can still apply for USDA loans, their applications won’t be processed until Trump signs a bill renewing appropriations (money) for the USDA.
If you were approved for a USDA loan but haven’t yet actually finalized your home purchase, you may be out of luck, especially if you’ve already spent money on appraisals and inspections. If you’re not sure of your loan’s status, consult with your lender.
Ripple Effects of Government Shutdown on Mortgage Lending
The takeaway from the above section is that the 2019 government shutdown will not directly affect most people’s mortgage loans.
But it may have some indirect effects.
Consider the warning that Moody’s Investor Service issued on January 10, which proclaimed, “Government shutdown raises non-bank mortgage lenders’ exposure to mortgage delivery risk.”
Essentially, the Moody’s argument is that, of the 800,000 federal workers currently furloughed, some were responsible for work related to originating and servicing mortgage loans. Without their work, lenders must find workarounds to verify certain lender information – something that’s part of evaluating the risk the lender takes on when lending money.
These workarounds, Moody’s points out, are likely to be less reliable and more susceptible to fraud than the established standard methods, meaning that, even though lenders still can complete mortgage loans, they may be less motivated to do so given the higher risk exposure they now face.
The shutdown may also cause a few other problems for homebuyers:
- Delayed income verification. Usually, borrowers provide income verification to mortgage lenders with the 4605-T form (named for its place in the tax code), which is a request for a borrower’s tax return. The IRS is in charge of processing these forms and sending the tax returns to mortgage lenders. While the IRS has been partially reopened since January 7, its employees face a backlog of requests. So while the income verification process usually takes about 72 hours, it could take much longer until the government reopens.
- Delayed SSN verification. Mortgage lenders may also need to verify a borrower’s Social Security Number (SSN) as part of the mortgage underwriting process. Again, limited staffing at the SSA could lead to backlogs, which could delay the mortgage lending process.
Both Fannie Mae and Freddie Mac issued guidelines in early January for mortgage lenders during the shutdown. Essentially, both groups (which purchase mortgages from lenders and repackage them into mortgage-backed securities to create greater liquidity in the lending market) said it’s still okay to continue issuing mortgage loans, but lenders (and therefore borrowers) should expect the process to take longer than usual.
Again, though, there’s a big caveat: both groups noted that their guidelines were meant only for a short-term shutdown. If the shutdown becomes a “long-term” affair (though neither group defines what counts as “long-term”), their guidelines may change.
Indeed, on January 16, just five days after publishing its first guidelines, Fannie Mae issued updated guidelines for lenders. These require mortgage borrowers to have at least two months’ worth of “reserves” in savings. That means enough money in savings to make monthly mortgage payments (plus home insurance, HOA dues, and anything else house-related) for two months or whatever amount is required by the firm’s Eligibility Matrix – whichever amount is higher.
In other words: thanks to the shutdown, it just got a little harder to secure a mortgage loan.
Flood Insurance During the Government Shutdown
If you live in a flood zone, you probably already know that most lenders require you to have an active flood insurance policy in place in order to issue a loan. In many cases, lenders require that this insurance be provided by the National Flood Insurance Program (NFIP), which operates as part of FEMA.
The good news: the NFIP announced on December 28, 2018, that it will be issuing new flood insurance policies and renewing existing policies through May 31, 2019, regardless of the status of the rest of the government.
Note: That’s a reversal of an earlier statement that the NFIP wouldn’t be issuing policies.
It’s also worth noting that the NFIP isn’t exactly in the best shape right now. All kinds of folks have been calling for a revamp of the program, which is in more than $20 billion of debt. We’ll keep you posted here about how things shake out.
FEMA Disaster Assistance During the Government Shutdown
The Federal Emergency Management Agency (FEMA) coordinates disaster assistance to Americans impacted by disasters like hurricanes and wildfires. During the 2019 government shutdown, FEMA plans to continue delivering its disaster relief services, which is possible because they’re paid for from a fund that isn’t affected by the shutdown.
If you need to apply for disaster assistance, go straight to DisasterAssistance.gov, which will be fully operational during the shutdown.
But while the most visible recovery efforts are moving forward, NPR has reported that some other efforts have stalled. Disaster recovery grants funded by the Economic Development Administration (within the Department of Commerce), for example, are inaccessible. People can’t apply for them and money can’t be distributed.
Another troubling development: prescribed burning work (meant to prevent future fires) has also been paused while federal workers are furloughed.
While neither of these is causing much immediate pain, their long-term fallout could be significant for homeowners in the area.
HUD Services During the Government Shutdown
Unfortunately, 95 percent of workers in the Department of Housing and Urban Development (HUD) are furloughed during the current shutdown. While HUD primarily provides services for renters, it also offers loans and grants to elderly and low-income homeowners who need to make home upgrades or repairs for safety or health reasons.
EfficientGov has put together a comprehensive list of what to expect from HUD during the shutdown.
Other 2019 Government Shutdown Considerations for Homeowners
A recent survey conducted by the National Association of Realtors found that about one in five realtors saw the government shutdown affecting either current or potential clients (i.e., current or future home buyers). Those effects are likely to worsen the longer the shutdown continues.
If you are a government employee who isn’t receiving a paycheck right now, consider approaching your lender sooner rather than later if you think you may miss mortgage payments. Already, several banks and credit unions around the country have announced plans to offer low-cost loans to borrowers affected by the shutdown. Some may also offer forbearance plans.
Obviously, none of these options are ideal, but getting in touch with your lender before you actually miss a payment is usually the best way to ensure that you don’t face any penalties.
If you still have questions about your mortgage, home insurance, mortgage insurance, HOA fees, or other home-related obligations during the shutdown, feel free to reach out (firstname.lastname@example.org). We’ll do our best to provide answers or point you to someone who can.