How Does A Government Shutdown Impact Mortgages?
Kevin Graham4-minute read
November 17, 2023
Originally Published: September 28, 2023
Last Updated: November 17, 2023
A bill was passed to fund the federal government through the beginning of next year. They broke out the deadlines by department.
Of relevance to mortgages, the Departments of Housing and Urban Development (HUD), Veterans Affairs (VA) and Agriculture (USDA) were funded through January 19. Other agencies were funded through February 2. If new funding measures aren’t put in place by the respective deadlines, a shutdown will result in the affected agencies.
In light of the short-term nature of the funding, we'll continue to update this story as further developments take place.
The government gets funded with a combination of American taxpayer dollars and government debt. Our elected representatives must pass a budget detailing how the government funds are to be spent. If there’s no agreement in place by the deadline, a federal government shutdown takes place.
As Congress comes up on its annual deadline, it’s reasonable for people to wonder about what a government shutdown would mean for all kinds of different concerns. There’s a lot of great reporting out there, but we want to focus on the impact of a government shutdown on mortgages, whether they be new or existing.
What Is A Government Shutdown?
A government shutdown involves the federal government ceasing operations that are deemed nonessential. Although it’s called a “shutdown,” there is flexibility for the continuation of functions such as defense, veterans benefits and Medicare and Medicaid services.
The government fiscal year runs from October 1 – September 30 of the following year. Members can also agree on short-term measures to fund the government for some time while they work out the year’s final budget.
If Congress doesn’t pass appropriations prior to the current deadline, a government shutdown can result.
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What Does A Government Shutdown Mean For Mortgages?
The impact of a government shutdown on your mortgage is going to vary based on whether you’re looking to finance a new home, refinance your current one or make payments on an existing mortgage.
The Impact Of A Government Shutdown On New Mortgages
If you’re trying to originate a new mortgage, in most cases, as of this writing, you shouldn’t see any problems. That could change the longer a shutdown goes on, so be sure to speak with a Home Loan Expert about the situation if you have any questions. There are a few areas, however, in which the shutdown could come into play.
The Department of Housing and Urban Development (HUD) will continue to process FHA loans. The Department of Veterans Affairs (VA) will also continue its loan origination role as of the latest update. Fannie Mae and Freddie Mac are government-sponsored entities, but they’re ultimately separate from the federal government, so operations should continue as normal. However, there may be some delays.
The first issue you may run into involves getting documentation from the government that you may need to qualify. The IRS is actively looking at other avenues to see whether it can stay open during a shutdown, but it’s up in the air. Thankfully, the IRS has an automated system for getting tax transcripts that doesn’t involve human intervention. Obtaining payoff letters for federal tax liens on the other hand, may face delays.
If you work for the federal government, verifying employment could be challenging depending on the contingency plan for your agency.
Another big impact is flood insurance. If you live within a Special Flood Hazard Area starting with the letter A or V as designated by the Federal Emergency Management Agency (FEMA), your lender, like Rocket Mortgage®, may require you to carry flood insurance.
When a private provider is more expensive or unavailable, the National Flood Insurance Program (NFIP) is often a resource. While people with current policies will be covered, new policies won’t be issued.
If you have a current policy dated prior to the government shutdown through NFIP and you’re closing on a refinance, Rocket Mortgage can close the loan as long as we see the declarations page outlining your coverage.
It’s important to note that many government workers are still working during this period with the promise of backpay when the shutdown is over. Because of this, for qualification purposes, Rocket Mortgage still counts you as maintaining your employment during the shutdown Other lenders may have different policies.
If you receive income from government-funded programs like Social Security or VA benefits, those checks will continue to come.
One underrated aspect of all this might be the impact it has on the direction of policy for the broader economy. The Federal Reserve is in the middle of a tightening monetary policy, changing federal funds rate targets with the goal of inflation down to no more than 2% per year. If it’s more expensive to borrow, the theory is people will spend less, which will lower prices.
Although not directly correlated with mortgage rates, the federal funds rate and mortgage interest rates set by lenders tend to flow in the same direction because the Fed funds rate is the rate at which banks borrow from each other. If that cost gets more expensive, it’s passed on to clients.
The challenge that officials have, is that they don’t want to overdo it with its tightening because that could tilt the economy into a recession. Federal Reserve Chairman Jerome Powell has already said they are trying to “navigate by the stars under cloudy skies.” The entire real estate market and broader economy depends on this as well.
As part of the shutdown, the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Census Bureau will all cease data reporting operations. This makes things tricky for a Fed that has said it’s going to be very data dependent in making decisions. It’s certainly something to keep an eye on.
The Impact Of A Government Shutdown On Existing Mortgages
With the temporary cessation of funding across various parts of the government, federal employees could have trouble making their mortgage payments. We would encourage you to speak with your servicer as soon as possible if you think you’re going to run into problems.
Clients who are impacted by the federal government shutdown requesting assistance may be offered an initial 3-month forbearance, which is a pause in mortgage payments. During a forbearance, late payment fees are waived and there is no minimum payment.
The Bottom Line
A government shutdown involves the suspension of funding for, and the temporary halt of, certain federal government activities deemed nonessential. If you’re trying to get a mortgage, the process at the moment should be normal, with delays possible. However, there could be issues getting certain required documentation or flood insurance.
In terms of income, federal employees still qualify because the expectation is that you’re going to be paid at the end of the shutdown if you’re working through it. Clients who need relief options should contact their servicer to discuss available options.
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