Challenges mount for mortgage lenders as shutdown persists
WASHINGTON — Although the partial government shutdown has not yet been long enough to significantly hamper the mortgage market, lenders and borrowers may already be feeling the strain.
The Federal Housing Administration has continued to process government-backed loans during the shutdown, but with the mortgage insurance agency operating with just a fraction of its work force, industry watchers expect a backlog in FHA endorsements that could extend beyond when the government reopens.
And while the FHA is endorsing loans, it has halted assisting financial institutions in underwriting them. This may not affect larger lenders that use the agency's automated underwriting system, but smaller institutions may temporarily need to adjust their underwriting process or wait for the FHA to be back at full speed.
Meanwhile, the processing of both government-insured and conventional loans is likely being affected by reduced operations at the Internal Revenue Service. Some lenders may be wary of closing loans without IRS documentation known as Form 4506-T, which provides official income verification and tax return transcripts. The form is unavailable with the government partially closed.
“It makes lending more difficult, especially in light of we are in the post-bubble-crash era where the income documentation is more thoroughly reviewed,” said Lawrence Yun, the chief economist at the National Association of Realtors.
The FHA is under the umbrella of the Department of Housing and Urban Development, one of nine cabinet-level agencies currently without funding. Official details on how the shutdown, which began Dec. 22, has affected the housing market are unavailable. But HUD has warned of an increasingly negative impact on homebuyers and the market as a whole with each day that the shutdown continues.
“A protracted shutdown could see a decline in home sales, reversing the trend toward a strengthening market that we’ve been experiencing,” the department wrote in its contingency plan for a possible lapse in appropriations for 2018. (HUD's website has not been updated since the shutdown began.)
In HUD's Office of Housing, which includes FHA, there are 2,386 employees. Yet only 103 employees of those employees are working during the shutdown, and up to 300 employees on any given day can be called to work on projects that are exempted from the shutdown on an intermittent basis.
Although most industry professionals believe that the impact to the housing market thus far has been limited, they said lenders and borrowers may be feeling an effect, particularly prospective home buyers with government jobs.
“Buying a home is a major expenditure, so people need to be assured that their job is secured and that the long-term direction of the economy is moving in the right direction,” said Yun. “The broader consumer will just sense that there is more uncertainty related to the economic activity going into the future, and if that is the case, that can hold back the consumer-buyer confidence about home buying.”
Due to the limited IRS activity, borrowers working in gig-economy jobs or who own small businesses will have an especially difficult time processing a home loan during the shutdown, since they must often jump through additional hoops to verify income.
“Self-employed borrowers have more complicated tax returns where you might want to see the full transcript to make sure the tax return you’re looking at is one that’s actually filed with the IRS,” said Pete Mills, a senior vice president at the Mortgage Bankers Association. “The more complicated the tax return, the more likely you’re going to want to see the transcript.”
But some lenders might be more inclined to forgo an IRS transcript in the short term or postpone verifications until the government reopens, said Brian Chappelle, a partner at Potomac Partners and former FHA official.
“I think lenders are pretty comfortable that from all the other documentation that they got from the borrower on their income and their credit and all the other things, that they don’t feel that’s much of a risk to close a conventional loan without the 4506 in light of the other documentation,” he said.
Although if the shutdown stretches on and lenders are forced to rely on supplemental income verification for more borrowers, some could change course, said Mills.
“I think in the last week of the year over the holidays, the impact is relatively muted, but now we’re in January and if this persists and the backlog continues, I do think the willingness to take that extra measure of risk will start to perhaps dissipate a little bit,” he said.
Lenders that originate FHA loans but sell them to a third party may also have trouble selling a loan without the IRS documentation.
“In many cases the aggregators want to see not only the signed form, but the actual transcripts themselves, and they’re not being processed so those loans get delayed,” said Mills.
Although the FHA can endorse new single-family loans during the shutdown, many of the agency’s employees are furloughed and spread thin, which industry professionals say will create a backlog of loans waiting to be processed when the government reopens.
“One has to sense that the longer the shutdown, the existing people that are working there are stretched and hence they cannot handle all the backlog that might be accumulating,” said Yun.
But Mills said unless the shutdown continues for a longer-than-expected period of time, the impact will be marginal.
“There will be a backlog but I don’t think it will be dramatic, but if we go on for a month, that could get significant,” he said.
Chappelle said the FHA's automated underwriting system does give the HUD agency an advantage over other government mortgage lending programs affected by the shutdown, such as the one run through the U.S. Department of Agriculture.
“Since now lenders process and underwrite the loans themselves and can obtain electronic endorsement themselves, everything is done without any HUD involvement,” he said.
And because borrowers can still obtain loans backed by Fannie Mae, Freddie Mac and the Department of Veterans Affairs— which is fully funded during the partial shutdown — the overall effect on the housing market could be negligible, said Chappelle.
The market is further helped by the seasonal pattern of home sales, which are considerably lower in January compared to the rest of the year.
“There will be some backlog as well as some little initial rush of activity once the shutdown finishes but the actual number of homes sales that will be delayed, I think those will be very miniscule of a number,” said Yun.
For now, observers remain cautiously optimistic that the shutdown will not last so long as to have dramatic consequences for the mortgage sector.
“It’d have to go on for a protracted period of time to have any effect,” said Chappelle.