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There hasn’t been this much anxiety about a “government shutdown” since October 2013. Back then, the government was “shutdown” for 16 days. Of course, when the federal government “shuts down,” it’s really a partial shutdown. A majority of government operations continue. But even a partial government shutdown has the potential to affect home sales.
Since only a portion of government employees get furloughed during a shutdown, there is always confusion about which agencies are affected. Back in 2013 many home buyers were jittery about getting their Federal Housing Administration and Veterans Administration loans processed so they could settle on time (the FHA is a part of the U.S. Department of Housing and Urban Development, while VA mortgages are guaranteed by the Department of Veteran Affairs). Additionally, many industry insiders were unsure about the impact a government shutdown would have on the recovering housing market.
Today we have some idea how government housing programs, specifically mortgages, will be affected in a shutdown because most federal agencies publicly post their shutdown contingency plans.
FHA’s 2013 shutdown contingency was focused on maintaining consistency in the housing recovery. The contingency plan stated “The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market. Approximately 80% of FHA loans are endorsed by lenders with delegated authority. The remaining 20% are endorsed through the FHA Homeownership Centers, leveraging FHA staff with a contractor that works on-site.”
The current FHA contingency is confident that most FHA loans will be unaffected. However, there is a warning that an extended shutdown can impact home sales. In HUD’s Frequently Asked Questions in the event of a Government Shutdown, regarding FHA’s operations they state, “Because we are able to endorse most single family loans, we do not expect the impact on the housing market to be significant, as long as the shutdown is brief. With each day the shutdown continues, we can expect an increase in the impacts on potential homeowners. home sellers and the entire housing market. A protracted shutdown could see a decline in home sales, reversing the trend toward a strengthening market that we’ve been experiencing.”
VA loans may be better positioned to weather a government shutdown. It is widely acknowledged that the Veteran Affairs learned from the government shutdowns that occurred in 1995-96. During those shutdowns, “Loan Guaranty certificates of eligibility and certificates of reasonable value [appraisals] were delayed.” However, because VA funding includes “advance appropriations,” a majority of the VA’s operations will continue during a federal government shutdown (including mortgages). The VA’s shutdown contingency plan indicates that in the event of a government shutdown, 95 percent of VA employees will be fully funded or required to perform “excepted” functions.
Will a short-term federal government shutdown affect the housing market? Probably not. VA loans are expected to continue without much issue. However, certain HUD functions required for FHA mortgages could be limited, but not expected to cause delays in a short-term shutdown.
However, an extended shutdown has the potential to affect home sales. Consider that FHA’s mortgage market share increased to approximately 17 percent in 2017 (compared to about 13 percent in 2013). An extended shutdown could cause significant FHA settlement delays, which would surely have an impact. Still, considering that home sales have dropped off since the summer, and the market is typically slow during this time of year, the effect on the housing market will probably be negligible.