Gov't Shutdown Could Freeze Home Sales

NEW YORK (MainStreet) — If the government shuts down because of the Congressional budget impasse, that could mean bad news for the housing market. The Federal Housing Administration will close and the FHA has a huge impact on home sales.

Congress and the White House could reach a deal at any time, but if they don’t – and the shutdown drags on for weeks as it did the last time (in late 1995) – new home deals could really sputter.

The FHA provides a backstop to homeowners – especially new ones – in providing mortgage insurance protection for millions of new home deals. Basically, new homebuyers who qualify get regular home loans, but they are insured by Uncle Sam.

When banks make FHA-approved loans, borrowers are assigned a case number needed to close the mortgage loan and the new home purchase. Without that case number though, those deals won’t close until the government is back open for business.

"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 in a White House press conference Wednesday.

In 2010 alone, the FHA insured about 40% of all new home mortgages in the U.S., according to analysts at Keefe, Bruyette & Woods.

But if the federal government does close down, the FHA – being a federal government agency – will close down with it. That would presumably slow or halt thousands of new home closings, as brokers would be reluctant to sign off on a new mortgage without FHA insurance. That wouldn't happen in all cases, but it would in many, judging by the FHA’s history of insuring new home loans.