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Shutdown Will Mostly Affect FHA Mortgages

Zillow Team
October 4, 2013

Now that the government has effectively shut down, what does it mean for housing?

The answer essentially depends on how long the federal government remains closed. The longer the shutdown persists, the deeper the impacts on both housing and the economy as a whole. But the agency that is likely to be most affected the biggest is the Federal Housing Administration (FHA).

Uncle Sam
Uncle Sam

Since Congressional leaders in both parties have failed to reach an agreement to fund the federal government this fiscal year (which began Tues., Oct. 1), all non-essential government employees have been ordered not to work, including the majority of employees otherwise tasked with approving and underwriting federal mortgages.

The federal government backs roughly 90 percent of mortgages in the U.S., through various government agencies including the FHA, Dept. of Veterans Affairs and through Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

The good news is that mortgages backed by Fannie Mae and Freddie Mac – the majority of mortgages in the country – should not be impacted by the federal closure, since Fannie and Freddie fund their operations independent of taxpayer and federal money. But mortgages secured through the FHA do require federal funds and need to be processed by federal employees, and so will likely be affected.

According to the Dept. of Housing and Urban Development (HUD), which oversees the FHA and other federal housing programs, only 67 of the FHA’s 2,972 employees are approved to work during the federal closure. As a result, the approval of mortgage applications through FHA will be severely slowed down.

According to Zillow Chief Economist Dr. Stan Humphries, a short-term disruption in some FHA loans is certainly not ideal, but shouldn’t have much long-term impact on overall housing demand or housing affordability. But the longer the shutdown drags on, the larger the backlog of mortgages needing approval will get, and the bigger the impact will be.

It is estimated that roughly 800,000 federal employees have been furloughed, uncertain when they will return to work and begin earning wages again. This will undoubtedly impact household budgets, leading many to consider postponing large purchases like a home or undergo large home improvement projects. This impact will be especially felt in areas with a high number of federal employees, like the Washington, D.C. area.

“A week or two of shutdown won’t be a huge deal, but the longer it goes on the bigger the impact on consumer confidence which, in turn, affects household formation rates and consumer appetite for buying homes,” Humphries said. “And, of course, it has an even more acute impact on the plans and resources of federal workers.” 

It is estimated the U.S. economy as a whole will lose about $300 million in economic output every day the government is shut down, according to research firm IHS Inc. That’s not much compared to the $15.7 trillion the economy produces annually, but over time that adds up, and will likely grow as business and consumers delay plans for big purchases.

The government shutdown comes just two weeks before an even more important deadline to decide on the nation’s debt ceiling. Unless the Treasury is given approval to borrow more money before Oct. 17, it will run out of money needed to pay everything from outstanding treasury bills to Social Security, military salaries and more. This would deal a huge blow to both the national and world economies, as many economic and financial decisions are based on the “full faith and credit” of the United States to pay its bills on time.

“If there has to be a stand-off, it’s better to have it now over the funding of the government, rather than later over raising the debt ceiling,” Humphries said. “The latter has unknown but potentially extremely large effects on the overall economy and, therefore, housing itself.”

The last time Congress debated the debt ceiling, the contentious fight led to a downgrade of the nation’s credit rating, even though an eleventh hour agreement was eventually reached. Another such downgrade could lead to a spike in mortgage interest rates and a stock market plunge, at a time when consumers can ill afford it.

“With the budget debate, we’re seeing a contest of wills, but it’s essentially a fist-fight,” Humphries concluded. “With the debt ceiling, we start playing with guns, and the likelihood of innocent bystanders getting seriously hurt goes way up.”