Here’s how a government shutdown could hurt mortgage borrowersby Peter Miller
As of late Friday (April 8, 2011) afternoon in Washington D.C., an agreement to continue the operations of the national government for a few days had been reached, but the lack of a longer-term arrangement raises a question: How would the mortgage and real estate markets be impacted if the government did shut down?
The real question concerns the Federal Housing Administration (FHA). It has a huge presence in the marketplace, and there’s no doubt that the FHA would stop processing loans in the event of a shut-down which lasted past the weekend. As HUD explained to lenders Friday evening, “FHA loans will not be endorsed during the government shutdown period.”
What would be the results if the FHA needs to close shop?
- Loans in process would be slowed or stopped;
- Existing FHA loans would be fine;
- The massive effort to stop FHA foreclosures would be halted;
- There’s a multiplier effect on borrowers that would magnify the negative impact of an FHA stoppage.
The FHA program is a mortgage insurance plan. Loans which meet FHA guidelines qualify for federal backing. While FHA borrowers must pay an upfront as well as a monthly insurance premium, borrowers can purchase homes with as little as 3.5 percent down. To the extent that interaction with the FHA is needed to process such financing it would stop if HUD offices are closed.
Measuring the impact
How big a deal would it be if FHA lending was shut down? In February, the FHA handled 114,000 loan applications. Translation: This is a big deal. The National Association of Realtors reported that in February the country was selling existing homes at the rate of about 407,000 units per month. So a big chunk of the market — about 28 percent — would be directly impacted if FHA loan processing was interrupted for several weeks.
Bottom line: FHA financing is cheaper
If FHA financing was cut off, borrowers would need to get loans from another source — the private sector. That’s a problem these days because many borrowers who qualify for FHA mortgages are unable to qualify for other financing at today’s mortgage rates. For instance, imagine that a property is being sold for $200,000. With FHA financing and 3.5 percent down, the borrower needs $7,000 in cash plus closing costs. Switch to a loan requiring 5 percent down, and now the borrower must bring $10,000 to closing just for the down payment.
Basic FHA underwriting standards are more liberal than conventional loan requirements. Typically, FHA borrowers can qualify for financing if no more than 29 percent of their gross monthly income covers housing costs (interest, principal, property insurance, and property taxes) and their overall debts do not exceed 43 percent of their gross monthly income. In lender slang, the FHA qualifying ratios are 29/43.
For conventional loans, the ratios are 28/36 — much more restrictive than FHA financing.
Here’s another example: An FHA household that earns $7,000 a month can devote $3,010 to housing costs plus monthly payments for such things as cars and student loans. With a conventional loan the allowable figure would only be $2,530.
Foreclosures could increase
HUD, the federal entity which oversees the FHA, has an exceptional foreclosure prevention program. In fiscal year 2009, HUD had an 83 percent “cure rate” for delinquent FHA loans.
The question is: What happens to the FHA cure rate if HUD offices are closed? It stands to reason that a growing number of foreclosures would result and thus more claims against HUD by lenders.
The multiplier effect
If one just FHA loan is stopped because of a government shut-down, it may not seen like that big a deal. However, that FHA borrower was going to purchase from a seller. Now the seller cannot close. Without a check from the settlement agent the seller cannot buy. Now a second seller is stuck. The second seller can’t close and so…you get the idea. A lot of transactions will grind to a halt.
The housing market today is fragile, reason enough to not to fool with mortgage programs that work. The FHA may not be guarding our borders, but the insurance they provide is vital to this country’s housing market and thus the national economy. If we actually have a prolonged shutdown, the FHA’s importance will become quickly apparent to all.
Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.