Now that the shutdown of the U.S. government has entered its second week, it’s expected to slow down mortgage approvals, which could negatively impact housing and economic recovery, Bloomberg reported Oct. 7.
After failing to pass a budget before the end of the fiscal year, Congress forced a partial government shutdown Oct. 2, the first in 17 years. The shutdown resulted in the furlough of around 800,000 government employees.
Borrowers applying for home loans could face delays as lenders are blocked from verifying Social Security numbers and Internal Revenue Service tax records. The shutdown also could increase wait times for borrowers seeking mortgages backed by the U.S. Department of Agriculture and by the Federal Housing Administration, although FHA said it would continue processing mortgages as best as it could “in order to support the health and stability of the U.S. mortgage market,” Bloomberg reported.
“The last thing we need is anything that shakes the confidence in a softly recovering housing market,” David Stevens, chief executive officer of the Mortgage Bankers Association, told Bloomberg. “If it’s a short-term shutdown, it’s a story about these employees put out of work. If it’s long-term, it’s a broader story about the adverse impact to the economic recovery.”
The shutdown hit just as construction and new housing sales have made a steady climb. Bloomberg reported that housing starts were showing an annual pace of 891,000 as of August, up from a low of 478,000 in April 2009. However, that figure still is only about two-thirds of the average rate for the last 20 years.
Housing prices have climbed 21 percent since hitting their post-recession low in March 2012, but they still are 21 percent below their June 2006 peak, according to data from the S&P/Case-Shiller index, Bloomberg reported.
Loan applications that conform to guidelines set by Fannie Mae and Freddie Mac will not be impacted by the shutdown, because Fannie and Freddie fund their operations through fees from private lenders, not from taxpayers.
Fannie and Freddie are responsible for the majority of new loans with the FHA and the U.S. Department of Veterans Affairs accounting for around a quarter of new mortgages. The USDA has cancelled loan closings through the shutdown. FHA’s workforce has been trimmed down by 90 percent for the duration of the shutdown.
According to Bloomberg, economists estimate that the government shutdown cut economic growth by 0.1 percentage points after just one week; costs escalate during subsequent weeks. Meanwhile research firm IHS Inc. estimated it will cost the U.S. $300 million a day in lost economic output for every day the government is closed.
However, a bigger concern than the government shutdown is whether or not Congress will raise the country’s debt ceiling by Oct. 17. Should they fail to do so, the U.S. will default on debt obligations, which would, in turn, lead to higher mortgage rates.
Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angles, told Bloomberg, “All bets are off and the downside economic impact will be grave” should the nation default on its debt.