Once again, we find ourselves at the precipice of a government shutdown. Unless Congress comes to an agreement with the President to pass at least a continuing resolution, all nonessential federal government functions will grind to a halt come October 1. Federal employees will be furloughed – possibly never to make up the wages lost.
This also means that key bureaucracies in the IRS, Department of Housing and Urban Development, and the bodies that regulate Fannie Mae and Freddie Mac will have to take some involuntary time off.
So what does that mean for the individual real estate investor or hometown agent?
I’m not anticipating weeping, wailing and gnashing of teeth. Yes, if a temporary shutdown lasted long enough, it could send some families living from paycheck to paycheck over the edge, and force a few defaults on mortgages.
But the key sources of credit for the real estate market writ large will not be directly affected. The Federal Reserve, for example, is actually a private entity, and does not rely on Congress for funding. In turn, the Federal Reserve will be able to keep the discount window open, to provide banks with emergency overnight liquidity to stay open and keep lending.
However, some market disruption could occur downstream. If lenders have trouble getting their VA and FHA loans processed, for example, we may see a temporary dry-up in these loans if the shutdown proves to be lengthy. That said, much of the system is electronic, and so I expect federal employees to leave the computers up and running when they (don’t) report for work on October 1.
In some cases, lenders may go ahead and fund any loans pending hiccups from the federal agencies. Other lenders may opt not to close until they receive a formal notification from the VA or FHA that the federal guarantee is in place.
If the 2011 shutdown is any guide, don’t count on the U.S. Department of Agriculture clearing their loans through the shutdown, but VA and FHA business should still mostly go through, because these aren’t federally funded. They are, however, federally guaranteed. The funding itself won’t be interrupted directly by the shutdown. But some lenders may not want to lend without a guarantee already in place. To minimize chances of disruption, go with a larger lender that is in a better position to fund these loans even absent a guarantee. During the 2011 fiscal battle, the Navy Federal Credit Union, Bank of America and Wells Fargo, for example, each indicated they intended to go ahead and close on and fund FHA and VA loans during a brief shutdown, even without a priori government approval for the guarantee.
Now, the FHA system is mostly digital. If the lender can get a case number from the FHA, you should be OK even through a shutdown. A lot depends on whether the Department of Housing and Urban Development shut down their computers on the way out the door on September 30. There are mixed signals about whether they will or not.
Loan approvals could be disrupted, because current guidelines require lenders to verify at least one tax return via a 4506 Transcript with the IRS. If the IRS office shuts down, they won’t be able to do this.
If, however, we do have some delays, that could cause preapproved loans to expire, and force some borrowers to pay a higher interest rate. Of course, some deals could fall apart, as a result of the delays.
The budget battle to avoid a government shutdown is just the first of the hurdles Congress faces this season. Within a few weeks, Congress will bump up against the statutory limit on borrowing. This would put the federal government on a cash and carry basis, and by some estimates would force a reduction in federal spending of 40 percent. I don’t think Congress can abide that for long, however, and predict that we will shortly have an agreement that allows the borrowing to continue, for good or for ill.
HUD Scraps Dual Agency Rule
In other Washington news, the Department of Housing and Urban Development has nixed a new regulation that would have prevented agents representing the buyer and the seller on the same pre-foreclosure deal from coming from the same agency. HUD was concerned that there was an opportunity for fraud.
The National Association of Realtors® opposed the rule, however, stating it created just another hoop for sellers to jump through, and they may be forced into foreclosure if they aren’t able to find an agent well-versed in the pre-foreclosure process. “Some real estate brokers have hundreds of agents across multiple offices. If one of those offices chooses to list a short sale, under HUD’s new policy, none of the other agents can bring a buyer to that property.” Wrote NAR President Gary Thomas.
With a million members, the NAR carried the day – and the rule was absurd, in that it simply didn’t take into account the realities of how real estate transactions are handled day-to-day. It was also a needless restriction on liquidity and a source of market distortion, and I’m glad to see it go.