As the federal government ground to a halt Tuesday, the question of how the shutdown will affect the housing market remains at the front of everyone’s mind. How will the market react? The answer: it depends.
Mortgages will continue to proceed through the usual government channels, although some delays are expected.
More than 90 percent of the residential housing market depends on the government and/or the GSEs for underwriting, insurance, and funding. Mortgages controlled by Fannie Mae and Freddie Mac will not be affected because they are funded by fees from lenders rather than federal appropriations.
Some concern has been raised about how the employment verification process would proceed in the event of an IRSshutdown. Freddie Mac issued the following clarification to lenders Tuesday: “If a loan is made to a government employee and the closing date is during the shutdown period, you do not need to obtain employment verification or re-verification prior to closing if a government office providing the verification is not able to do so as a result of the temporary shutdown. You are also not required to obtain employment verification or re-verification for such loans after the shutdown ends. This exception does not apply to income verification or any other requirements…We only require IRS Form 4506-T to be signed by the borrower prior to closing. We do not require that 4506-T be processed by IRS prior to closing. However, we require that the actual 4506-T information is obtained as part of the Seller’s in-house QC program.”
Most economists agreed that the broader effects of the shutdown should be minimal, assuming that the shutdown is short-lived.
“The most significant immediate term impact of the government shutdown is whether it rattles households and businesses by impacting uncertainty and confidence. With the shutdown only several hours old, it is too early to tell.
So far the financial markets have not reacted wildly, which would get everyone’s attention,” said Peter Muoio, chief economist with Auction.com Research. “All that said, the primary potential transmission mechanism is through uncertainty. So far this year, the decreased levels of uncertainty have supported stronger economic growth and, therefore, demand for both residential and commercial real estate. We must gauge the shutdown’s impact on uncertainty and stress that a quick solution would clearly have less impact than a prolonged fight.”
The securities division of Wells Fargo issued a report to investors predicting the broad economic effects of a shutdown would be “minor.”
“Our expectation is that our fourth quarter GDP call would be reduced by 0.0-0.5 percent…There would be negative effects on government spending and reduced consumption from the furloughed workers,” the report said. “Historically, following a government shutdown, the federal government boosts consumption and federal workers’ payroll is restored. The primary reason for the minimal economic impact during this shutdown stems from the fact that most of the negative effects and the subsequent positive bounce back effects are currently expected to be contained within the same quarter of growth.”
Research firm Capital Economics predicted that the effect of a shutdown would be minimal provided that it doesn’t presage a fight over the upcoming debt ceiling increase.
“Over a whole year, the cost would be equivalent to about 0.3% of GDP, which is manageable,” Capital Economics said in an update. “If the current shutdown drags on, however, then once the debt ceiling limit begins to bite in the second half of this month, the economic and market impact would become much greater. In all likelihood, the Treasury would not have enough cash on hand to make a scheduled Social Security payment of nearly $25 billion on November 1. It would also be unable to meet a debt interest payment of roughly $30 billion that will fall due on November 15, potentially triggering a technical default.”
The communications department at HUD shut down Tuesday morning, issuing the following statement: “MostHUD programs have been temporarily interrupted and most HUD employees have been told they cannot work. We will not be able to check this account or respond to questions during the shutdown.”
The Department of Veterans Affairs will continue its loan guarantee program, although there could be some delays. The Department of Agriculture will cease its mortgage financing activity.