Government Shutdown: Destroying Home Sales?
How is shut down impacting housing now?
The primary impact thus far relates more to government agencies that support the financing necessary for home loans than to homeowners/buyers/prices per se. For example anyone trying to buy sell or refinance a home now will learn;
Fannie and Freddie don't rely on appropriated funds (ironically now that they're generated healthy profits) But as per the contingency plan required by OMB, non essential staff have been cut meaning applications are taking longer than usual to process and approve.
The HUD contingency plan for FHA (about 25% of loans) has also cut staff from thousands to less than hundreds in some cases. I've been told less than, 30 staffer are signing FHA mortgage insurance approvals. Again expect delays. This at a time when FHA just asked for $1.7 billion bailout due to losses in its insurance fund (mutual mtg ins fund) circe 2007 to 2009 and reverse mortgages (FHA has over $30 billion liquid assets and another $17 billion in 2013 but is required to reserve for 30 year losses)
The VA (about 10% of loans) has not cut staff but expect delays.
The department of agriculture which handles rural loans (about 5%) has cancelled new loans and guarantees field office staff issue conditional commitments good for 90 days but they're "non essential"
TIP: contracts need to be written with longer than usual time to financing and no waiver of that contingency until closed, buyers risk losing deposits.
Also underwriting process depends on other government agencies. For example;
Many IRS employees have been furloughed. Lenders often need tax returns (form 4506) particularly for self-employed, some are closing and verifying income after.
Lenders also verify social security number, normally done online Flood insurance (FEMA) still operating since funded by premium but I've heard there are delays. May also be due to changes oct 1 (see below)
TIP: lock in your rate longer than the usual 45 to 60 days
Government loans for new MULTI family construction are also on hold. SBA isn't doing new loan guarantees.
Recent accommodations for folks trying to save their homes; HAMP. accepting signed tax returns without verifying thru IRS for now. Making Home Affordable is funded under the Emergency Economic Stabalization Act which is not discretionary spending.
Recent accommodations for folks trying to buy a home: Freddie announced this week that government staff not being paid due to shut down who are applying for home loan can be approved is reasonable likelihood will be paid again once shut down lifted. Also offering mortgage relief; forbearance 3 to 12 month for unemployed.
During the first few days the shutdown was not having a noticeable impact on home buyers or sellers. According to the Realtors, buyers and sellers I'm hearing from the shutdown is now a primary consideration which makes sense - why would anyone who did not HAVE to buy or sell do so now except cash buyers? Buyers risk losing their deposit and having no place to move into if they receive a loan approval and something happens after - for example - they’ve given an existing landlord notice - that prevents funding as well as long delays until they get that approval. Sellers risk having their deals fall thru or take longer than expected. Particularly for sellers planning to simultaneously buy another home this can put their own deposit and closing at risk.
I would expect this will impact mortgage business and perhaps bank profits. Already mortgage business is seeing a downward trend due to tougher underwriting and less refinancing due to higher rates. The longer it lasts the worse it will be for bank profitability.
What if US default?
Most obvious direct impact would be rising rates. Higher rates translate to more buyer money going to pay interest, less available for principal (price of home) potentially impacting home prices.
Less directly, the rise in borrowing costs in general experienced by homeowners and potential buyers could result in less interest or ability to buy homes and pay existing mortgages potentially translating to less demand (again impacting prices) and more mortgage loan defaults / distressed sales (again impacting prices). Likewise, consumer confidence would also potentially impact home sales and prices.
TIMING. Shut down comes at a time when were already expecting changes in housing.
New rules begging jan 1 which will make loans tougher to get. Safe harbor ability to repay under QM Max 43% DTI. 3% costs 30 yr am. Etc. 3 in 10 won't qualify.
Talk of lowering GSE loan limits, was set for jan 1.
New flood insurance rates rolled out oct 1.
NOTES - indicators in general.
Prices up 14.7% yoy. 18 mo in row.
Sales 5.48 million. up 1.7% mom 13.2% yoy. 26 mo in row. Highest level since 5.79 million 2007
Inventory 2.25 million 4.9 mo, was 5 mo in july. 6 mo last year.
Distressed 12%. Down mom. Down yoy ( was 23%). Lowest since tracked. Sell for 12 to 16% less.
First time 28%. Down mom and yoy (31%). Investors about same.