When the government shuts its doors because of a funding brouhaha that pits the White House against Capitol Hill, who gets hit hardest among people needing a home mortgage? The latest version of federal breakdown made one fact painfully clear: It all depends on the type of loan you seek and where you’re located.
Worst hit, of course, have been the thousands of federal employees who’ve been furloughed, gone unpaid and had no assurances about when the financial uncertainty might end.
But what about others? Here’s a quick overview:
If you’d been hoping to buy or refinance a house during the past couple of weeks with a conventional loan — a mortgage eligible for purchase by dominant investors Fannie Mae and Freddie Mac — your application or closing probably sailed through with few if any hitches, according to Pete Mills, a senior vice president for the Mortgage Bankers Association.
Though Fannie and Freddie operate under federal government conservatorship and use federal guarantees, they are not government agencies, and they’ve conducted business as usual. To the extent that they’ve been touched by the shutdown — such as through the non-availability of tax return transcripts the IRS routinely provides lenders to verify applicants’ incomes — both companies have adopted work-arounds to keep the loans flowing.
The situation has been starkly different for prospective buyers who live in the small towns and exurbs surrounding virtually all major cities. Many of them are in the process of financing homes with mortgages backed by the U.S. Department of Agriculture (USDA), which offers exceptionally attractive terms — zero-down payments and favorable interest rates. But for these borrowers, the shutdown has been a nightmare. The USDA loan program, which has provided well over 100,000 home mortgages per year recently, has been in total lock-down. Scheduled loan closings have been put on hold, and no new applications are being processed.
“It breaks my heart” to see what this has been doing to small-town buyers, says one lender who specializes in USDA loans. Not only have closings been postponed indefinitely, but some buyers are facing potentially deal-killing deadlines in their purchase contracts, according to Helga James, president and owner of Barr Group Mortgage, based in Gulf Shores, Alabama. “I’m afraid that the sellers will not extend contracts, and buyers could be out money [they’ve spent] on inspections and appraisals and have to start the whole process over again,” James told me.
Matt Leyrer, a senior loan officer with Northern Mortgage — which operates in multiple states in the Midwest as well as Connecticut, Massachusetts, Florida and California — says some USDA borrowers potentially could be left homeless from the shutdown. If their purchase contract contingency deadlines aren’t met, and they’ve already canceled their rental lease, they could forfeit their good-faith deposit and end up with no home at all. “They could lose everything,” he told me.
If you applied for a Federal Housing Administration (FHA) or Veterans (VA) loan, the odds are you’ve had no major problems so far. The Department of Veterans Affairs has kept its home-loan program functioning during the shutdown. Lenders say a small percentage of VA applicants who’ve needed to obtain replacement discharge documentation required for a VA certificate of eligibility have experienced delays, but otherwise there have been no unusual holdups. FHA loan applications have seen delays because of limited staff and backlogs of cases, according to lenders, but the impact has not been significant.
One source of problems that borrowers might not have anticipated during the shutdown: Some self-employed home buyers or others who are seeking a “jumbo” sized mortgage that can’t be sold to Fannie, Freddie or FHA have found themselves subject to hyper-conservative underwriting standards.
Paul Skeens, president of Colonial Mortgage Group based in Waldorf, Maryland, says some big banks and investors who normally fund jumbo loans have balked at loan applications that are not pristine, such as those lacking standard IRS Form 4506-T tax transcripts or verifications of employment. This is despite the fact that Fannie and Freddie have adopted easy work-arounds to problems like these.
“It can be a hassle” for borrowers with out-of-the ordinary income profiles or any sort of special situations or quirks in their applications when major sources of funding decide to avoid taking on extra underwriting risks during a federal shutdown, says Skeens.
Bottom line: Shutdowns have mortgage victims — some people simply get inconvenienced, others face personal disasters. The longer the shutdown, the more widespread the likely pain.