How the Shut-Down is Affecting RE Investors

With the government shut down now for about a week, RE investors are beginning to feel the effects in different ways.

Real estate loans are experiencing the largest impact, making it near impossible for any buyers to complete their purchase. The problem hasn’t been the real estate loans that have closed in the last week, because they’ve most likely already had their paperwork in order. The problem is the up-and-coming loans.

Among the biggest obstacles, it is furloughs at the IRS that could have the widest impact. Lenders routinely file a form with the IRS asking for a copy of a borrower’s tax returns. The purpose is to make sure that the buyer provided accurate income information.

But the IRS sent most of its employees home last Tuesday when Congress failed to agree on a budget, including those that process what are called tax-return transcripts.

Lenders also rely on the Social Security agency to verify borrowers’ Social Security numbers as a way of confirming their identity. These checks are done automatically, but the website that provides the information is down.

At the FHA, which plays a crucial role in the housing market by insuring loans with low down payments for first-time home buyers, the full-time staff of 3,000 is down to 64, and there are only 30 employees responsible for signing off on mortgage insurance for single-family homes. While large banks have the resources to approve lenders for FHA-backed loans, smaller lenders rely on the agency itself to do this. About 25 percent of home purchases are made with mortgages backed by the FHA, as are 15 percent of all mortgages, including refinancings.

An additional 10 percent of home loans are guaranteed by the Department of Veterans Affairs, which still has a full staff approving mortgages for veterans. But, again, we’re seeing loans grind to a halt because of the income verification and identity verification done by the IRS and Social Security.

Finally, the Department of Agriculture, which backs less than 5 percent of mortgages, has canceled new loans and guarantees in its program for buyers in rural areas. These loans are also called USDA or rural housing– and they’ve helped many new home buyers get 100% financing in a world where 100% hasn’t existed for some time.

While this obviously affects buyers, this is bad news for sellers, too. Sellers are more jittery right now with many loans in limbo. Real estate listings have been taken off the market– as much as 10 % in some markets in the last week.

And there is no end to the shut-down in site. With attention on Capitol Hill shifting to an Oct. 17 debt-ceiling deadline, relief for prospective home buyers (and sellers) isn’t coming any time soon.

Many lenders are telling buyers and sellers that they can’t guarantee a settlement date. But most are proceeding with business as usual, submitting IRS transcripts with the hope that they get ahead of what they believe will be a very long line once the government reopens.

The silver lining? If home buyers can hang in there, they may get a bonus, as mortgage rates keep falling while government agencies are shuttered.

Cash buyers could also benefit from the shutdown. The longer it takes for mortgages to close, the more attractive cash buyers become to sellers who want to ensure a sale will close quickly

And one man’s shutdown is another’s boon. The insurer American International Group(AIG) is attempting to attract customers who had been trying to get coverage through the FHA. AIG’s mortgage insurance unit, United Guaranty, told clients it will accept completed FHA paperwork and evaluate applications within 24 hours.

Source: Washington Post, BloomburgBusinessweek.com

 

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