Shutdown hampers rates, rural, HECM and niche condo loans

The lingering government shutdown has increased rate uncertainty, and cut off or curtailed some specialized mortgages while mainstream business moves forward, albeit at a slower pace in some cases.

"Until key reports like payrolls and the CPI return, rates are likely to remain range-bound but vulnerable to sudden shifts," said Sam Williamson, chief economist at First American, referencing the Consumer Price Index report.

Although the shutdown began with some downward pressure on benchmark 10-year Treasury bond yield, it later experienced some upward pressure related to uncertainty around monetary policy direction and fluctuated.

"That volatility is spilling into mortgage rates, which loosely track the 10-year," Williamson said.

Between rate uncertainty and shutdown-related slowdowns in processing that may be related to things like public staffing shortage or a need to work around federal flood insurance restrictions, mortgage applications inched down last week. 

In addition, some segments of the market are particularly constrained.

Some of the details around how rural, reverse mortgage, condominium and home improvement loan markets have been impacted and the effect on lenders and borrowers follow. 

The current status of the USDA Rural Housing Service program

In line with past suspensions of federal budgetary functions, the Department of Agriculture's home lending has been "effectively shut down," said Daniel Jacobs, head of the TruTeam at CrossCountry Mortgage, in line with a statement on the USDA website.

"Their staff is on furlough and there is currently no ability to obtain conditional commitments," he said.

USDA borrowers have been among the hardest hit because their loans are specialized in ways that make it difficult to find a private market equivalent. 

Exemplifying this is the fact that it is the only agency to offer a construction-to-permanent single-close loan that can immediately be securitized, noted Sean Faries, CEO at Land Gorilla, a provider of loan construction automation for lenders.

"That was starting to gain traction and won't be able to continue without appropriation," he said.

What limits to FHA condo lending mean for single units

Also, FHA condo projects can't be processed through the Department of Housing and Urban Development's HUD review and approval process. HRAP otherwise would allow single-unit approvals even if the overall building they're in didn't have one, subject to limits.

The lack of available condo approvals limits FHA lending in that sector to buildings that had approvals before the shutdown.

While the HRAP is typically limited to 10% of a building's units — or two for housing projects with less than 10 — workarounds for those that can't access it may be limited to moving to options outside the FHA program. Some customers in the FHA market might not qualify for those.

Some reverse mortgages face endorsement suspension and RFI

The FHA also is not processing new approvals to insure Home Equity Conversion Mortgages during the shutdown but other aspects of that market have been functioning.

"In the short term, only endorsements are on hold," said Michael McCully, partner at New View Advisors, a provider of capital markets and investment banking services for the reverse mortgage industry.

A lender may choose to move forward with a HECM without an endorsement if they have the wherewithal to hold the loan on their balance sheet until the shutdown ends, similar to the way some companies have been willing to make conforming loans early.

"While HECM endorsements have been suspended it is not adversely impacting the ability of many lenders to facilitate timely closings for consumers," Jacob said.

In addition to suspended endorsements, HECMs have drawn focus in a request for information that Ginnie Mae — which remains operational during shutdowns — released Oct. 2. The RFI seeks feedback on HECM securitization risks, opportunities, the impact on private capital and what's held back volume.

While there are private market options and securitization numbers have seen limited growth over time, HECMs have historically constituted the largest part of the reverse mortgage market.

Impact on Title I and the difference technology makes

Endorsements for the niche Title I program, which includes home improvement products with a relatively small balance and certain manufactured housing loans, also have been suspended for the duration of the shutdown.

"The HUD Title I program is rarely offered by mortgage lenders anymore. Community banks and credit unions are the most likely sources," said Dan Green, president of Homebuyer.com, an information and lead generation website.

Other types of renovation loan programs at the government-sponsored enterprises that operate outside the federal budget process and endorsements for another FHA program called 203k that serves as a rehab and purchase loan remain available.

The 203k program, like other FHA offerings, could still be impacted by thin staffing due to furloughs amid the shutdown, which any service that's not completely automated may be susceptible to, said Faries. 

Because a 203k loan can be a bit more complicated than some other mortgages, it might be more likely to require staff intervention that could be affected by furloughs that the Trump administration has threatened to transform into layoffs, if allowed.

"You could get into a situation where you had to do some sort of manual underwriting exercise and needed guidance," he said. "If you know you have this loan that's super complicated and you need help, you could expect delays in the process just due to short staffing."

Increased automation in government-related housing finance has made it easier to weather the shutdown in some cases, Faries said.

"I remember the IRS being a big hiccup, but now that they've got a lot of automation in place a lot of services provide that automatically," he said.