Gov't Shutdown Could Freeze Home Sales

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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.

The National Association of Realtors prepared a brief on what consumers and mortgage professionals can expect from a government shutdown. In it, the NAR says that nobody knows exactly what will happen with a shutdown, but some conclusions aren’t hard to draw.

“While the true impact of a shutdown is unclear until it actually begins, [we have] a synopsis of how federal housing programs will likely operate in the event of a shutdown,” says the NAR.

“The FHA cannot offer endorsements for any new loans in the Single Family Program, and cannot make commitments in the Multi-family Program in the event of a shutdown,” the NAR says. “The FHA will maintain operational activities including paying claims and collecting premiums. Management & Marketing (M&M) contractors managing the REO portfolio can continue to operate.”

There is some good news on the government housing agency front though, regardless of the shutdown. The Treasury Department has announced that both Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) will remain open for homebuyers to purchase and guarantee new home mortgages. Fannie and Freddie aren’t technically government agencies, although both are under the direct oversight of the Treasury Dept., and are only operating thanks to a line of credit from the government (by way of the American taxpayer).

Past that, it’s new homebuyers who will bear the brunt of the FHA closing its doors – even temporarily. Remember, the 1995 government shutdown lasted three weeks – and that’s a lifetime to a new homebuyer looking to close on his or her dream house.

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