As the U.S. government shutdown enters its second week, home buyers and sellers are learning just how big a role the federal government plays in the lending process.
Lenders, acting more cautiously in the aftermath of the mortgage meltdown, now often check with the Internal Revenue Service to make sure borrowers earn as much as they claim—the IRS will provide confirmations if the borrowers have given written permission—but since the shutdown the IRS has stopped doing so. Banks also ask the Social Security Administration to verify identities. The Washington Post reported on Friday that the Social Security confirmation is usually done online, but the website is currently down.
Another change since the housing crisis: The federal government has a bigger share of the mortgage market. About a quarter of all mortgages for buying homes are made through the Federal Housing Administration, which provides insurance so borrowers can make lower down payments. The Veterans Benefits Administration and the U.S. Department of Agriculture both also run mortgage programs that allow smaller down payments. Some larger banks can still process these loans on their own, the Los Angeles Times reports, but other lenders must run each loan application by the agencies, which now have smaller staffs.
As my Bloomberg News colleague Zachary Tracer pointed out this morning, one man’s shutdown is another’s boon. The insurer American International Group is attempting to attract customers who had been trying to get coverage through the FHA. AIG’s mortgage insurance unit, United Guaranty, told clients it will accept completed FHA paperwork and evaluate applications within 24 hours.
Cash buyers could also benefit from the shutdown. The longer it takes for mortgages to close, the more attractive cash buyers become to sellers who want to ensure a sale will close quickly. Cash buyers have played a big role in the recovery—45 percent of all sales in August were cash-only, according to RealtyTrac—and that’s already upset potential buyers who can’t afford to pay all cash and say they’ve been locked out of the market’s low prices and low interest rates.
Just how painful the delays become depends on the length of shutdown, the Mortgage Bankers Association says. The market can shrug off short delays, but a longer one could cause the housing recovery to suffer.