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Budget impasse threatens FHA lending

Shutdown would put gov't-backed mortgage insurance on hold

The budget deadlock and looming shutdown of the federal government wouldn’t affect Fannie Mae and Freddie Mac, but it could put the brakes on FHA and other government-backed loan guarantee programs.

The Obama administration has proposed $33 billion in spending cuts, while Republicans are reportedly pushing for $40 billion or more. House Republicans Thursday passed a bill to push back a shutdown by one week. But that bill includes spending cuts opposed by Democrats, and President Obama has threatened a veto if it’s approved by the Senate.

In the event of a government shutdown, the Federal Housing Administration "will not be able to endorse any single-family loans, and staff will not be available to underwrite and approve new loans," a HUD spokeswoman told Inman News.

Although so-called "full eagle" lenders vetted by FHA have direct endorsement authority, in the event of a government shutdown FHA would power down its automated systems for processing those loans, in effect suspending all lender insurance approvals.

"Technically, the banks can close on a loan that’s been FHA-approved if they want to, but they will be taking the risk on their own books," the HUD spokeswoman said. "Some may choose to do so, but (in the event of a government shutdown), they will not receive FHA insurance until FHA is up and running."

FHA insured mortgages on about 19 percent of home sales in the fiscal year ending Sept. 30, 2010, and just under 16 percent of sales in October, according to the latest figures from HUD.

USDA and VA loan guarantee programs, although smaller, could be affected in similar ways. Those agencies did not immediately respond to requests for comment.

According to a bulletin issued by the National Association of Realtors, lenders may continue to process and guaranty mortgages through the VA Loan Guaranty program.

For U.S. Department of Agriculture rural housing programs, staff who typically issue conditional commitments, loan note guarantees, and modification approvals are not classified as "essential personnel," and lenders would not receive approvals in the event of a shutdown, NAR said. Lenders who have received conditional commitments may close those loans.

As the Obama administration and Republican lawmakers continue negotiations over proposed budget cuts, the President has pointed to the potential impacts to FHA lending as one example of how a shutdown "could have real effects on everyday Americans."

"It may turn out that somebody who was trying to get a mortgage can’t have their paperwork processed by the FHA and now the person who was going to sell the house — what they were counting on, they can’t get it," President Obama said Wednesday, speaking at a town hall discussion in Pennsylvania on energy policy.

Testifying before Senate lawmakers today, U.S. Housing and Urban Development Secretary Shaun Donovan said he is "very concerned that a significant number of lenders would not choose to close" on pending FHA loans, Dow Jones reported.

Fannie Mae and Freddie Mac, which the government placed under conservatorship in 2008, would not be affected by a shutdown because the Treasury Department’s preferred stock purchase agreements with the companies are not subject to the annual appropriations process, said a spokeswoman for their regulator, the Federal Housing Finance Agency (FHFA).

FHFA itself is not subject to a shutdown because it is funded by assessments on Fannie, Freddie and the Federal Home Loan Banks.

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