Does the 2019 government shutdown disrupt mortgage lending?

On 21 December 2018, the government shutdown started at midnight, and now we are four weeks into the current state of affairs. This makes it the longest government shutdown with no prospects of it ending any time soon.

It implies that thousands of non-critical federal workers will go on leave without pay. Almost 800,000 Americans have endured without paychecks, compelling most of them to look for part-time jobs to make ends meet. The status quo has also impacted mortgage lending in several ways.

Increased Risk

To start off, mortgage lenders have to put up with increased risks. Professional Investment consultants have cautioned every lender at each category to expect a spike in the risks involved in mortgage delivery.

The ongoing disruption caused by the government shutdown will put a bit of strain to the balance sheets of most non-bank mortgage lenders. Additionally, there is a high chance of making bad loans for all lenders across the board.

Social Security

Real estate professionals also pointed out that lenders will have to manoeuvre other ways of validating Social Security documents without government aid. They will also need to check tax returns directly from the borrower, bypassing the Internal Revenue Service (IRS). And despite the IRS resuming operations on 7 January, there is still a great backlog and a deficiency in manpower which causes delays.

Federal Housing Administration (FHA) Mortgages

FHA remains operational during the current shutdown and continues to finance most single-family borrowers. However, FHA is not approving cases comprising Title I loans or reverse mortgage loan.

Even so, you can expect delays in FHA loan processing because of the decrease in the pair of hands on desks. The underwriting stage is bound to consume more time. The delays are projected to disrupt operations even after shutdown because of the work-pile to be done.

Veterans Affairs (VA) Loans

Eligible veterans who applied for new mortgage loan continue to express their dissatisfaction with the extended duration of loan processing, despite the VA department’s continued services. Other applicants say that business is underway as usual. Any queries or concerns may receive late responses; thanks to the furlough that’s being experienced by the support staff.

US Department of Agriculture (USDA) Loans

The government shutdown halted operations at the US Department of Agriculture. Therefore, no Guaranteed or Direct loans are being processed. It also halted any Direct Loans that were under processing.

However, your mortgage lender may close your guaranteed loan under the circumstance that the loan was scheduled for completion within the shutdown period. The only alternative is to wait till federal services resume, and the USDA works through the backlog of loan applications.

How will banks and non-bank lenders cope if the shutdown continues?

In case the shutdown continues for long, the government systems and other federal agencies that are working, such as the flood insurance will soon close their doors. That will force lenders to look for flood insurance providers from private firms. The implication of that is a spike in costs and lack of the insurance cover.

A continued shutdown will adversely affect non-bank lenders. They will find it challenging to sell small portions of their loans to federal workers as they’ll lack the sources of verifying their employment details.

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