How exactly does a government shutdown affect real estate? So long as it doesn't drag on too long, the main and immediate impact is the slow down or temporary postponement of the origination of some mortgages and other real estate loans. And that can be very significant since most real estate closings involve a buyer obtaining a loan. If the loan doesn't fund, the deal doesn't close and that's usually bad news for all the parties involved. The following provides you with very specific details on which loans are affected and how; so that you can be prepared and make adjustments accordingly.
The Government’s Role in Mortgage Origination
Government Shutdown Affect on Conventional Mortgage
When a mortgage broker or a loan originator says that a loan is going conventional, that means that when the loan is originated, it will be sold on the secondary mortgage market, primarily to organizations like Fannie Mae or Freddie Mac. Conventional mortgages have their own set of guidelines that must be followed in order to flip or sell that loan on the secondary mortgage market. So, most banks and mortgage companies, they're in the flipping business too. They originate the loan, package it up and make sure all the guidelines are set. Then they flip it as soon as they originate it.
Conventional Mortgage Market Guidelines
Here are the guidelines that must be followed for conventional mortgages that the government plays a key role in.
1. Form 4506-T:
These are the tax transcripts that an underwriter is going to request directly from the IRS. They want to verify the tax returns that you usually provide as a borrower when you are submitting your application for a loan. They're going to verify those by looking at what the IRS has in their transcripts. When the government shuts down, the IRS is reduced to a skeleton crew, and getting these transcripts can take longer.
2. Federal Verification of the Social Security Number:
They will request verification of the borrower’s Social Security Number from the Social Security Administration. During a shutdown they're also on skeleton crew. As a result, these two items are not easy to obtain. Either it takes longer, or they just don't get them.
How Does this Impact a Loan?
The loan just doesn't get originated. However, that's typically not going to happen if it's a short-term government shutdown. What will usually happen is the lender will originate the loan because the mortgage company or the bank is originating the loans and then flipping it. However, they can't immediately sell it on the conventional mortgage market. They must wait until they receive these two documents.
In some cases, if it drags on, maybe Fannie Mae/Freddie Mac will allow them to let that slide or they'll get it later. At the very least this can delay things. A good portion of all the loans that are originated are conventional, so this is the primary impact for most of you if you're in the middle of a deal.
Government Shutdown Affect on Government-backed Loans
These are a little bit different. In the conventional market they're selling the loan to Fannie Mae or Freddie Mac. With a government-backed loan, the same bank or mortgage company might be originating the loan, but they're going to get a guarantee from either FHA, VA or USDA Rural.
- FHA: Getting an FHA guarantee can be difficult, especially as it drags on because up to 95% of the HUD employees are off in a government shutdown. However, single-family homes are put at the highest level of priority with the 5% of employees left. That means it may be possible to get the guarantees. Also, the lender might decide they're going to go ahead and roll the dice and originate the loan, counting on a guarantee once things start up again. But if your deal is a multi-family, a HELOC or a reverse mortgage, that’s not happening with FHA because that's not as high of a priority for them.
- VA: VA is fiscally funded throughout 2019, so they will be working full-time. The entire staff will be there. If it's a VA loan, you have no problems.
- USDA Rural: They are not going to be giving guarantees at all in a government shutdown at this point. It would be really at the lender's risk to originate that loan without getting that guarantee. If you're about to sell a property to a buyer getting a USDA Rural loan, and there's a government shutdown, that might stop it until things open back up.
Government Shutdown Affect on Flood Insurance
There is one more small piece in this puzzle to consider and it is flood insurance. In the event of a government shutdown, flood insurance policies are not being issued. A couple possible solutions would be to try to assume the seller’s policy or consider private insurance. I don't have a ton of experience with private flood insurance. I have quite a few flood insurance policies on properties I own, but they are all federal-backed flood policies.
In a lot of cases there is some level of flexibility here, especially if it's short-term. They'll might get flexible if the money for the flood insurance policy is put into escrow at the time of closing. Even though the insurance policy hasn't been issued yet, they might move forward with that loan. I'm not as much worried about this, and I don't think you should be as either. The flood insurance is probably, in most cases, not going to impact you.
This is how a government shutdown can affect real estate, and it's specifically the origination of mortgages. It means that you may have to be patient. The deal might not close on time and it might take a week or two longer for the deal to close. That might be a concern of yours, and I get it.
The way we solve this problem is to have a lot of deals going. That way, as deals are closing, you're stockpiling cash all the time. Whether it's a government shutdown or another complication, there's always something in real estate that could postpone the closing. With this method, if one of these hiccups occurs, it doesn't get you down or doesn't disrupt your flow.