Will a federal shutdown increase mortgage rates?
April 27, 2011
Can a shutdown in Washington affect your ability to buy a home? Given the large number of mortgage programs backed by the government, it certainly could.
What a government shutdown means for mortgages
According to the National Association of Realtors, 43 percent of all financing was backed by FHA insurance in 2010. In a shutdown, HUD would close and with it the FHA would wind down. The same is true for the Veterans Administration and its VA loan program.
Current FHA and VA borrowers would not be especially impacted - just be sure to send in full and timely payments (and yes, the Postal Service will be open).
However, those who are now applying for financing and refinancing will be unable to close federally-insured loans. If a shutdown drags on, many lenders will suspend FHA and VA mortgage programs, meaning that to close only loans requiring more down will be immediately available. In turn, requiring more down will mean that some sale agreements will not go to closing.
As to current mortgage rates, the last thing lenders want is uncertainty so it can be expected that the shuttering of the U.S. government would instantly cause mortgage quotes to rise.
The hidden problem here is that a string of transactions could be impacted if even one closing is delayed. Imagine that Smith is buying the Jones house. Smith is financing with an FHA loan. If that financing is not available then Smith cannot close on the purchase. Now think about Jones. He was going to use money from the sale of his home to buy from Wilson. If Jones cannot close then Wilson cannot move. And on and on.
The catch, of course, is how can a lender process a loan application when the end of the shutdown is unknown? The more logical course will be to halt such originations.
Payments and credit
Lenders have become very concerned regarding credit quality and there have been increasing demands for higher credit scores. However, a shutdown is likely to impact credit in two very different ways.
First, with a brief shutdown credit reports are likely to be unaffected. Since a credit report only includes accounts which are at least 30 days late, a brief shutdown should allow you plenty of time to make a payment within the 30-day timeframe, so your ability to secure the best mortgage rates would not be changed. A longer government shutdown might be a different story.
Second, while a short shutdown would not be much of a credit issue, it could result in additional expenses. Imagine that a government contractor goes unpaid. The result is that the contractor's workers do not get their checks, cannot pay their bills and then get stuck with various creditor charges.
You would like to think that lenders will not penalize those impacted by the dispute in Washington, but don't bet on it. Make sure you have enough cash on hand to meet your bills just in case there's a shutdown--and just in case the shutdown is longer than expected.