Federal shutdown undercuts mortgage industry’s loan approvals
Beginning next week, thousands of home buyers will be unable to get approvals for their mortgages because of the government shutdown, potentially undercutting the nation’s resurgent housing market.
Without paperwork from the Internal Revenue Service, the Social Security Administration and in many cases the Federal Housing Administration, banks and other mortgage lenders will be less willing to make loans, if they can make them at all. Lenders, for instance, rely on the IRS to confirm borrowers’ income and the Social Security agency to confirm their identify.
Every day government offices remain shuttered will delay an ever-larger fraction of mortgage closings, industry leaders say, jeopardizing mortgage and interest-rate approvals and spooking sellers. About 15,000 new home mortgages and 18,000 refinancings on average are completed across the country each day.
Yesterday, House Republicans continued to insist on changes to President Obama’s health care program as a condition for funding the government. But with attention on Capitol Hill shifting to an Oct. 17 debt ceiling deadline, there was no end in sight to the government shutdown, nor relief for prospective home buyers.
“Most people don’t really think about, ‘Well my loan is going to be underwritten by a federal agency,’ ” said Marj Rosner, vice president and sales manager at Long & Foster, a real estate firm. “But the government has a huge imprint here.”
Major lenders are scrambling to figure out whether they can risk making some loans without the federal paperwork and assessing whether they should require additional documentation from borrowers because the IRS has no one working who can verify income.
Many mortgages were able to close as scheduled this week because the paperwork was completed before federal employees were furloughed, but some home loans have already been frozen.
“The problem is going to grow in magnitude every day this shutdown goes on, because lenders’ liability is at risk,” said David Stevens, chief executive of the Mortgage Bankers Association and former head of the FHA , after a conference call yesterday with heads of a dozen banks.
Nor will the problem disappear as soon as the government reopens.
“Even if this were to get resolved in a week, you’ve got an enormous backlog,” said Eric Gates, president of Apex Home Loans in Rockville, Md. “It’s going to double or triple the effects in terms of delays.”
The approval of mortgage applications requires several interactions with the federal government that many home buyers may not know about. Lenders have become much more meticulous about following federal rules after the housing crisis, which began in 2007, and are now more thorough in verifying the information on loan applications. These concerns were far less common when the government last shut down in 1995.
“The need for document checks and quality control just didn’t exist,” Stevens said. “Today, we’re in a world of huge risk and regulatory requirements.”
Among the obstacles, it is furloughs at the IRS that could have the widest impact. Lenders routinely file a form with the IRS asking for a copy of a borrower’s tax returns. The purpose is to make sure that the buyer provided accurate income information.
But the IRS sent most of its employees home Tuesday when Congress failed to agree on a budget, including those that process so-called tax return transcripts.
Lenders also rely on the Social Security agency to verify borrowers’ Social Security numbers as a way of confirming their identity. These checks are done automatically, but the website that provides the information is down.
At the FHA, which plays a crucial role in the housing market by insuring loans with low down payments for first-time home buyers, the full-time staff of 3,000 is down to 64, and there are just 30 employees responsible for signing off on mortgage insurance for single-family homes. While large banks have the resources to approve lenders for FHA-backed loans, smaller lenders rely on the agency itself to do this.
About 25 percent of home purchases are made with mortgages backed by the FHA and 15 percent of all mortgages, including refinancings.
An additional 10 percent of home loans are guaranteed by the Department of Veterans Affairs, which still has a full staff approving mortgages for veterans. But the Department of Agriculture, which backs less than 5 percent of mortgages, has canceled new loans and guarantees in its program for buyers in rural areas.
The shutdown of Agriculture’s Rural Development loan programs has cost Matthew Green the starter house he’s been waiting to buy since April, when his real estate agent showed him a three-bedroom split-level on an acre in Warrenton, Va., that was in foreclosure.
Green, 28, a mechanic who works in Chantilly, Va., was approved in late August for a $210,000 loan. The next step was getting the government to sign off so he didn’t have to make a down payment.
On Monday, a day before the shutdown, the lender called his agent, Starr Ibach, and reported that the Rural Development staff was backed up but that there was still plenty of time for the loan to go to closing on Oct. 16. Then Green got a text message from Ibach early Tuesday morning: “RD is closing down and no one’s working.”
“It just made me sick to my stomach to think I might lose this house and there’s nothing I can do about it,” Green said yesterday. “What are the odds of this happening?”
Green sold his Toyota Tundra truck two weeks ago to pay closing costs. If he doesn’t close Oct. 16, the bank has told Ibach the house will be sold at auction four days later.
The government shutdown comes amid a two-year surge in home prices as buyers have taken advantage of historically low mortgage rates. Even as rates have edged up in recent months, sales have not dampened as much as economists feared. Sales of existing homes reached a six-year high in August.
For federal employees applying for a mortgage, the situation is even more daunting. With the government closed, verifying their income could prove impossible.
“Who’s going to be there to verify that someone works for the government?” said Peggy Ferris, an agent with Long & Foster. “No one.”
The shutdown and deep federal budget cuts are also making some lenders more cautious about extending loans to federal workers. Wells Fargo has begun requiring borrowers who work for the government to disclose whether their jobs are at risk of being affected by budget cuts “or if they’re at risk of being furloughed in any way,” said Ryan Dailey, a lender with Prosperity Mortgage, a Wells Fargo affiliate.
Home sellers are already starting to get jittery, several agents said.
“They’re asking, ‘If people are not going to be buying my house because they can’t get mortgages, should I take it off?’ ” Rosner said. “Or maybe I shouldn’t put it on the market.”
Since the government shutdown, nearly 500 residential listings have been taken off the market in the District of Columbia, Southern Maryland’s Montgomery County and Northern Virginia’s Fairfax County, according to the Metropolitan Regional Information System. In the District of Columbia, that represents about 7 percent of all listings.
While lenders and real estate agents say they are having trouble getting clear information from the government, Kathryn Joseph, a senior mortgage banker with Apex, said she is being realistic with her clients.
“I’m telling everybody, including the borrower and the agent, that depending on when the government opens and we get these forms processed, we can’t guarantee a settlement date,” she said.
Other lenders are proceeding with business as usual, if only to get ahead of what they believe will be a very long line once the government reopens.
“We’re ordering the IRS transcripts so we can get in line, so our request is already in their inbox,” said Richard Harbin, a senior loan officer with Monarch Mortgage. “We’re still sending them in with the hope they’re going to be addressed, at some point.”