Last updated: May 15, 2018

How Government Discord Affects the Mortgage Market

2018 has involved multiple disagreements in Congress leading to two different government shutdowns. A government shutdown literally means that most of the federal government cannot operate due to the inability to pay salaries and bills. Federal employees are furloughed to cut costs and only the essential functions of government are funded in the interim.

A government shutdown occurs when Congress fails to pass an appropriations bill for funding, or when the President fails to sign one. In the last 30 years, there have been six government shutdowns, each of which had significant consequences on the American economy. S&P, a financial ratings agency, reported that the 2013 government shutdown that lasted 16 days cost the US economy around $24 billion overall – which breaks down to $1.5 billion per day.

The potential economic damage extends to the mortgage industry, as well. Here are four areas that a government shutdown affects within the lending market.

Interest Rates

Interest rates are highly reactive to the ebb and flow of the economy, but not as an organic measure, such as the stock market. Instead, interest rates are purposely set in reaction to economic trends. The Federal Reserve, America’s central bank, controls the cost of borrowing money upon which banks determine their prime rate. If the economy is strong, interest rates are likely to be raised. If the economy is slowing, interest rates will be lowered to attract investment and borrowing.

If the Fed thinks that a government shutdown could last for a length of time, interest rates may be lowered to help offset the resulting economic loss and instability. Neither of the 2018 shutdowns lasted long enough so far for interest rates to adjust, but previous shutdowns have lowered interest rates.

FHA Mortgages

The Federal Housing Administration is a government institution, which means it will suffer directly from a government shutdown as FHA employees are furloughed to cut costs until a budget can be passed. Borrowers that are seeking an FHA loan in the middle of a government shutdown could be stuck.

Lenders must request an FHA case number to process the FHA loan for their customer. If the Federal Housing Administration is out of service due to a lack of funding, lenders are therefore unable to process any FHA mortgages until a case number can be assigned.

Tax Documentation

Another critical component of processing a mortgage application is the borrower’s tax information. As a federal agency, the IRS requires government funds to operate. A government shutdown means lenders might be unable to verify income information with US tax returns, which is a problem as it is a legal mandate to verify at least one year’s worth of tax information before approvals.

Housing & Urban Development (HUD)

The Department of Housing & Urban Development (HUD) is another key component that will suffer in its capacity to operate. For instance, during the latest government shutdowns of 2018, the Federal Housing Administration, a subsidiary of the HUD, had to send home 96% of their staff. Only 337 of nearly 9,000 employees were on the job. Only the most essential functions were maintained.

The HUD has several primary directives including community planning and development, housing, housing for at-risk communities, Ginnie Mae, safety standards for housing, and more.

To negotiate government challenges, it is important for lenders and brokers to work with a firm with government-backed loan experience.

Pacific Union Financial

Pacific Union Financial, LLC is a full-service mortgage lender providing originations and loan servicing across the United States. A privately held direct lender with Fannie Mae, Freddie Mac, and Ginnie Mae approval, we originate loans through our Retail, Wholesale, and Correspondent channels. Let us know how we can help you expand your business.