In the market
With the debt limit deadline looming, I thought it would be an interesting exercise to consider what happens to the mortgage market in the event Washington runs out of money.
Before we get into all the scary talk, let me say I think it's unlikely our elected officials will fail to act before the deadline. But let's go through the thought exercise anyway.
If you're applying for a mortgage, the effects of a government shutdown depend on where you are in the process and the type of mortgage you are trying to get. Please understand this is educated speculation. Should a shutdown happen, anything is possible because I expect the politicians will manipulate the situation to their greatest political advantage (I am not a politician, and I don't want to play one on TV).
If you're applying for a conventional loan, a shutdown may have little direct impact on you. Most conventional loans are sold to Fannie Mae and Freddie Mac, and, while they are wards of the state now, they still operate fairly independently. However, if your lender needs to verify your tax returns or social security number, you may be out of luck. I expect the IRS and Social Security Administration will not be considered essential government services.
The biggest hassle may be in store for those applying for FHA loans. I expect the White House will deem the Federal Housing Agency (FHA) a non-essential agency. You probably won't be able to start or close an FHA loan.
If you're applying for a Veteran's Administration (VA) loan, you may be able to proceed as long as your lender has processed your VA paperwork (such as your Certificate of Eligibility) and has received the appraisal on your home. I expect the While House will deem the VA a non-essential agency, and, while many of their systems are online now, I expect they will take the Web sites offline while the agency is shut down. If you're past this point in the process, you should be OK. A VA loan is a guaranteed loan, and the VA delegates underwriting to approved lenders. Thus, the lender closes the loan with its own funds and probably sells the loan into the mortgage market.
If you're applying for a US Department of Agriculture Rural Development (USDA RD) loan, you may be OK if the loan has been approved. The USDA must review every RD loan, and this review occurs near the end of the process, after the lender has finished its underwriting of the loan. I expect the While House will deem the USDA a non-essential agency, so you're stuck if the USDA hasn't completed its review. If the loan is approved, I expect you'll be able to close because an RD loan, like a VA loan, is a guaranteed loan.
The biggest hassle may be in store for those applying for FHA loans. I expect the White House will deem the Federal Housing Agency (FHA) a non-essential agency. You probably won't be able to start or close an FHA loan. The FHA must issue a "case number" to start an FHA loan and, because FHA loans are insured loans, the FHA must issue an insurance certificate at closing. Any loans in process probably will grind to a halt until the shut down is over.
What might happen to interest rates if the government bumps up against the debt limit? I don't claim to be clairvoyant, so I'll turn to Michael Barr, a former Assistant Treasury Secretary for guidance. He suggests, based on past experience, the effect would be a short-term, modest increase in interest rates, less than 0.1%. However, he notes that many other factors cloud our current economic picture, and the combination could create unexpected effects.
While a government shut down could be a mess, you have to realize that there's a really big difference between that and a government default. Despite all the political scare tactics, I think it's VERY unlikely the government will choose to default on its debt. If the deadline passes without action, the government still will take in a lot of money, but it won't be enough money to cover all its obligations. The government will have to prioritize its bills. If interest payments on the national debt are considered a priority, the government won't default.
Steve and his wife have owned a local mortgage company, Texas Lone Star Lending, since 1996.