How The Government Shutdown Affects Mortgage Lending
By Richard Cirelli
As usual, Congress can’t agree on anything and as we all know, we have a government shutdown. How does it affect mortgage lending?
It appears the mortgage industry will be only mildly inconvenienced. Conventional loans that are mostly sold to Fannie Mae and Freddie Mac are least affected. But, if the shutdown lingers on, it will eventually have more of an impact. Here’s what’s been said so far:
FHA and VA Loans:
Government loan programs such as FHA and VA loans that are sold primarily to Ginnie Mae will be slightly affected but FHA and VA will remain open. The Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) will continue to insure and guarantee loans during the shutdown. In addition, Ginnie Mae will continue to be fully operational and provide lenders with authority to issue new pools. So, FHA and VA lenders can continue to originate loans and continue to securitize those loans via Ginnie Mae.
Rural housing lenders that originate loans under the USDA program will not be so lucky. The Rural Housing Service will not be issuing new loan commitments during the shutdown.
Conventional loans, which make up by far the largest share of loans in our local markets, should not be affected. The government sponsored enterprises (GSE’s) known as Fannie Mae and Freddie Mac will continue to buy loans from lenders.
Jumbo loans – loans larger than $625,500 in our local markets – will not be affected at all since they are not sold to the Fannie Mae or Freddie Mac.
Area of Concern:
One area of concern is the ability of lenders to obtain a borrowers tax transcripts from the IRS. It is common practice by all lenders to have the borrower execute the IRS 4506-T form at the time of application. This enables lenders to obtain a copy of the tax transcripts directly from the IRS to check for discrepancies, which protects lenders from having to repurchase a loan from the GSE’s.
The IRS has stopped processing 4506-T requests due to the federal government shutdown. Fannie Mae and Freddie Mac only require the 4506-T form to be signed and it is at the lender’s discretion to process the tax transcripts prior to closing. But lenders may feel that they are taking a risk if they don’t get a transcript from the IRS that verifies the borrower’s Social Security number and income. Lenders are worried about the buyback risk if they can’t get the IRS to verify the borrower’s income. If the loan defaults or a GSE does a quality control review and finds the borrower’s income was misstated, they might end up having to buy that loan back. If the shutdown goes on for several weeks, that decision gets harder to make as lenders take more risk for every loan they close without the IRS Tax Transcripts.