Lawmakers on both sides of the aisle are bracing for a government shutdown next week that could dent homebuyer and seller sentiment and create technical issues that keep some clients who do want to move forward with deals from getting to the closing table.
The National Flood Insurance Program (NFIP) is set to expire on Sept. 30, and federal agencies critical to processing paperwork like the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA) and Internal Revenue Service (IRS) face staffing reductions that could disrupt mortgage approvals.
The federal government employs more than two million civilians, — mostly in Washington, D.C., but nearly as many in states like California, Virginia, Maryland and Texas — who could lose their appetite for buying or selling a home.
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FHA, VA and USDA loans
HUD has a contingency plan for a shutdown that could allow many housing programs to continue with “limited operations during a shutdown, while others will face significant disruptions,” the National Association of Realtors said in a member bulletin.
“FHA systems will remain operational, but any actions that require staff involvement may be delayed or suspended during a shutdown,” NAR said.
The Federal Housing Administration (FHA) would continue to endorse new single family mortgages, for example, but would not process condominium project approvals, NAR said.
The Mortgage Bankers Association expects that a shutdown would necessitate “significant curtailment of certain operations requiring agency staff intervention or action” for FHA, VA and USDA loans.
“Given that short-term shutdown threats have become somewhat routine, MBA anticipates that most agencies have begun their plans for maintaining essential functions,” the trade association for independent nonbank mortgage lenders said in a statement to Inman. “MBA will provide a member guide that outlines the potential impacts to single-family and multifamily government lending programs.”
Flood insurance lapse
If the National Flood Insurance Program (NFIP) lapses, the government will be unable to sell or renew flood insurance policies after 11:59 pm Eastern time on Sept. 30.
The federal requirement to purchase flood insurance would be suspended, leaving it up to lenders to decide whether to approve mortgages in special flood hazard areas while NFIP insurance is unavailable.
Private flood insurance will still be available — NAR recommends that agents consult information published by the Pennsylvania Insurance Department and the Florida Office of Insurance Regulation for options. Thanks to a 2022 policy shift, FHA borrowers can also opt for private flood insurance.
During an NFIP lapse, sellers would also be allowed to assign their existing policies to homebuyers — insurers can simply substitute the buyer’s name for the seller’s without having to reissue the policy.
Fannie Mae and Freddie Mac
In the past, government shutdowns haven’t affected staffing at mortgage giants Fannie Mae and Freddie Mac, NAR noted.
But borrowers could still face issues obtaining required loan documents like tax transcripts, verification of social security numbers, and proof of flood insurance. Federal employees may have difficulty obtaining verification of employment.
During the 2018 government shutdown, the IRS suspended issuance of tax return transcripts.
“The roughly 12 percent of employees who were required to report to work could open mail only in search of checks payable to the government and were not allowed to answer taxpayer phone calls, issue tax refunds, release liens and levies, or perform most other taxpayer services,” NAR said.
Most agents weren’t impacted by last shutdown
Three out of four real estate agents surveyed by NAR said past government shutdowns have had no impact on contract signings or closings in progress, but 11 percent saw an impact on current and potential clients. Among those who saw an impact on clients, 25 percent said they had clients decide not to buy due to general economic uncertainty.
Uncertainty is already an issue for many homebuyers, regardless of a government shutdown. Fannie Mae’s latest National Housing Survey, conducted in August, showed only 28 percent of consumers thought it was a good time to buy a home. But that was up five points from July, thanks to expectations that mortgage rates and home prices will soon stabilize or decline.
The 2018-2019 government shutdown “had no impact” on the Westside Los Angeles housing market “and I don’t anticipate that the upcoming shut down will move the needle at all,” Danny Brown, a luxury Realtor with Compass in Beverly Hills, told Inman via e-mail.
“If anything it reinforces savvy consumers to park their assets into real estate as a flight to safety in case the government makes irrational policy decisions,” Brown said.
Most of Brown’s clients buy and sell high-end homes in Brentwood, Pacific Palisades, Santa Monica, Bel-Air, Beverly Hills, Westwood and Cheviot Hill.
Odds of shutdown seen as ‘99%’
It’s been more than six years since the federal government shut down over a budget impasse — for 35 days from Dec. 22, 2018, through Jan. 25, 2019.
The shutdown put a temporary $11 billion hit on the economy over two quarters, the Congressional Budget Office (CBO) later estimated. That represented less than 1 percent of gross domestic product, and CBO estimated all but $3 billion of the hit to economic productivity was delayed, rather than lost.
Congress averted a shutdown in March by passing a continuing resolution that funded the government through Sept. 30.
But the odds of that happening again look slim, with Democrats wanting to negotiate the terms of another continuing resolution that includes an extension of health care tax subsidies that expire at the end of the year, among other concessions.
Republicans are insisting on a “clean” bill with no such concessions, with President Trump canceling negotiations planned for Thursday with Democratic leaders Sen. Chuck Schumer and Rep. Hakeem Jeffries.
“I think there’s a 99 percent chance that there’s a shutdown,” GOP strategist Brian Darling told The Hill. “There just doesn’t seem to be any endgame for either party to get out of a shutdown.”
The White House Office of Management and Budget (OMB) on Wednesday ordered federal agencies to draft plans to permanently cut staff who perform jobs that aren’t legally required, rather than simply furloughing workers temporarily.
“The move marks a significant break from how shutdowns have been handled in recent decades, when most furloughs were temporary and employees were brought back once Congress voted to reopen government and funding was restored,” Politico reported. “This time, OMB Director Russ Vought is using the threat of permanent job cuts as leverage, upping the ante in the standoff with Democrats in Congress over government spending.”
Editor’s note: This story was updated with comments from Danny Brown, a luxury Realtor with Compass in Beverly Hills, California.
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