How A Government Shutdown Affects Mortgages

Washington Monument and reflecting pool at dawn

Originally Published: October 3, 2023

Last Updated: October 3, 2023

Author: Kevin Graham

The government gets funded with a combination of American taxpayer dollars and government debt. Our elected representatives must pass a budget detailing how the government funds are to be spent. If there’s no agreement in place by the deadline, a federal government shutdown takes place.

As Congress recently came up on its annual deadline, it was reasonable for people to wonder about what a government shutdown would mean for all kinds of different concerns. While a bill was passed to fund the government, it is only until November 17, 2023. That means another threat of shut down could be looming. People may be seeking answers to prepare for what may be ahead. As we continue to upate this story as further developments take place, here's some relevant information on the impact of a government shutdown on mortgages, whether they be new or existing.

What Is A Government Shutdown?

A government shutdown involves the federal government ceasing operations that are deemed nonessential. Although it’s called a “shutdown,” there is flexibility for the continuation of functions such as defense, veterans benefits and Medicare and Medicaid services.

The government fiscal year runs from October 1 – September 30 of the following year. If Congress doesn’t pass appropriations prior to the October 1 deadline, a government shutdown can result. Congress can also agree on short-term measures to fund the government for some time while they work out the year’s final budget. this was the case for this year, as they agreed on funding until November 17, 2023.

What Does A Government Shutdown Mean For Mortgages?

The impact of a government shutdown on mortgages is going to vary based on whether your client is looking to finance a new home, refinance their current one or make payments on an existing mortgage.

The Impact Of A Government Shutdown On New Mortgages

If you’re trying to originate a new mortgage, in most cases, as of this writing, you shouldn’t see any problems. That could change the longer a shutdown goes on, so be sure to speak with ayour Account Executive about the situation if you have any questions. There are a few areas, however, in which the shutdown could come into play.

The Department of Housing and Urban Development (HUD) will continue to process FHA loans. The Department of Veterans Affairs (VA) will also continue its loan origination role as of the latest update. Fannie Mae and Freddie Mac are government-sponsored entities, but they’re ultimately separate from the federal government, so operations should continue as normal. However, there may be some delays.

The first issue you may run into involves getting documentation from the government that your clients may need to qualify. The IRS is actively looking at other avenues to see whether it can stay open during a shutdown, but it’s up in the air. Thankfully, the IRS has an automated system for getting tax transcripts that doesn’t involve human intervention. Obtaining payoff letters for federal tax liens on the other hand, may face delays.

If your client works for the federal government, verifying employment could be challenging depending on the contingency plan for their agency.

Another big impact is flood insurance. If your client lives within a Special Flood Hazard Area starting with the letter A or V as designated by the Federal Emergency Management Agency (FEMA), lenders may require them to carry flood insurance.

When a private provider is more expensive or unavailable, the National Flood Insurance Program (NFIP) is often a resource. While people with current policies will be covered, new policies won’t be issued.

If your client has a current policy dated prior to October 1, 2023, through NFIP and they’re closing on a refinance, Rocket Mortgage can close the loan as long as we see the declarations page outlining their coverage.

It’s important to note that many government workers are still working during this period with the promise of backpay when the shutdown is over. Because of this, for qualification purposes, Rocket Mortgage still counts clients as maintaining their employment during the shutdown. Other lenders may have different policies.

If your client receives income from government-funded programs like Social Security or VA benefits, those checks will continue to come.

One underrated aspect of all this might be the impact it has on the direction of policy for the broader economy. The Federal Reserve is in the middle of a tightening monetary policy, changing federal funds rate targets with the goal of inflation down to no more than 2% per year. If it’s more expensive to borrow, the theory is people will spend less, which will lower prices.

Although not directly correlated with mortgage rates, the federal funds rate and mortgage interest rates set by lenders tend to flow in the same direction because the Fed funds rate is the rate at which banks borrow from each other. If that cost gets more expensive, it’s passed on to clients.

The challenge that officials have, is that they don’t want to overdo it with its tightening because that could tilt the economy into a recession. Federal Reserve Chairman Jerome Powell has already said they are trying to “navigate by the stars under cloudy skies.” The entire real estate market and broader economy depends on this as well.

As part of the shutdown, the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Census Bureau will all cease data reporting operations. This makes things tricky for a Fed that has said it’s going to be very data dependent in making decisions. It’s certainly something to keep an eye on.

The Impact Of A Government Shutdown On Existing Mortgages

With the temporary cessation of funding across various parts of the government, federal employees could have trouble making their mortgage payments.

Clients who are impacted by the federal government shutdown requesting assistance may be offered an initial 3-month forbearance, which is a pause in mortgage payments. During a forbearance, late payment fees are waived and there is no minimum payment.

The Bottom Line

A government shutdown involves the suspension of funding for, and the temporary halt of, certain federal government activities deemed nonessential. If your clients is trying to get a mortgage, the process at the moment should be normal, with delays possible. However, there could be issues getting certain required documentation or flood insurance.

In terms of income, federal employees still qualify because the expectation is that they’re going to be paid at the end of the shutdown if they’re working through it. Contact your Account Executive with any questions you may have.

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