Ripple Effects of Government Shutdown on Mortgage Lending
The takeaway from the above section is that the 2019 government shutdown will not directly affect most people’s mortgage loans.
But it may have some indirect effects.
Consider the warning that Moody’s Investor Service issued on January 10, which proclaimed, “Government shutdown raises non-bank mortgage lenders’ exposure to mortgage delivery risk.”
Essentially, the Moody’s argument is that, of the 800,000 federal workers currently furloughed, some were responsible for work related to originating and servicing mortgage loans. Without their work, lenders must find workarounds to verify certain lender information – something that’s part of evaluating the risk the lender takes on when lending money.
These workarounds, Moody’s points out, are likely to be less reliable and more susceptible to fraud than the established standard methods, meaning that, even though lenders still can complete mortgage loans, they may be less motivated to do so given the higher risk exposure they now face.
The shutdown may also cause a few other problems for homebuyers:
- Delayed income verification. Usually, borrowers provide income verification to mortgage lenders with the 4605-T form (named for its place in the tax code), which is a request for a borrower’s tax return. The IRS is in charge of processing these forms and sending the tax returns to mortgage lenders. While the IRS has been partially reopened since January 7, its employees face a backlog of requests. So while the income verification process usually takes about 72 hours, it could take much longer until the government reopens.
- Delayed SSN verification. Mortgage lenders may also need to verify a borrower’s Social Security Number (SSN) as part of the mortgage underwriting process. Again, limited staffing at the SSA could lead to backlogs, which could delay the mortgage lending process.
Both Fannie Mae and Freddie Mac issued guidelines in early January for mortgage lenders during the shutdown. Essentially, both groups (which purchase mortgages from lenders and repackage them into mortgage-backed securities to create greater liquidity in the lending market) said it’s still okay to continue issuing mortgage loans, but lenders (and therefore borrowers) should expect the process to take longer than usual.
Again, though, there’s a big caveat: both groups noted that their guidelines were meant only for a short-term shutdown. If the shutdown becomes a “long-term” affair (though neither group defines what counts as “long-term”), their guidelines may change.
Indeed, on January 16, just five days after publishing its first guidelines, Fannie Mae issued updated guidelines for lenders. These require mortgage borrowers to have at least two months’ worth of “reserves” in savings. That means enough money in savings to make monthly mortgage payments (plus home insurance, HOA dues, and anything else house-related) for two months or whatever amount is required by the firm’s Eligibility Matrix – whichever amount is higher.