From buyers to lenders, the housing market might face another calamity if the federal government shuts down midnight Friday.
In that case, the Federal Housing Administration, which insured 22 percent of all new mortgages made in the past 12 months, will not be guaranteeing loans. It’s a potential blow to a lot of first-time home buyers and lower-income buyers, because FHA allows down payments as low as 3.5 percent.
“Now consumers may pay the price for this,” said Mike McHugh, head of the Empire State Mortgage Bankers Association and chief executive of Continental Home Loans in Melville. “That would be terrible. People buying homes and not being able to close because the government shut down.
“Once that happens, it’s a trickle down effect. Borrowers may have to update their documentation. Appraisals are going to expire.”
If Congress and President Barack Obama can't agree on temporary spending by midnight Friday, lenders will have two main options. They can put off making FHA loans until Congress and Obama pass spending bills. Or they can make the loans and hold them until FHA reopens, but that would limit how many mortgages they can make and how much free capital they have to lend.
In the past two days, Obama and Shaun Donovan, head of the Department of Housing and Urban Development, warned that a shutdown could jeopardize the weak housing market. Congressional Republicans and Democrats are far apart on how to close the budget gap, but discussions continue.
Obama pressed his point Wednesday at a town hall discussion in Pennsylvania (seen here): "It may turn out that somebody who was trying to get a mortgage can't have their paperwork processed by the FHA. Now the person who was going to sell the house, what they were counting on, they can't get it."
Donovan today warned the Senate appropriations subcommittee on housing: “This is the worst time that we could introduce that uncertainty into this fragile housing market.”
One of Donovan’s fears is that a “significant number” of lenders won’t make loans. At least 50 percent of Continental’s business is FHA and McHugh has little stomach for making loans if his company has to carry the risk who knows how long.
“It really was hitting me this morning,” McHugh said. “I‘ve got no guidance from any agency or anywhere on what’s going to happen.
“A loan that’s made – things happen. Somebody dies, something happens and then they (FHA officials) come back and they don’t want to insure the loan after the loan is closed. That would put the bank at risk. If the government is not going to issue the insurance . . . we’d have to think hard about lending the money until that is available again.”