Shutdown hits FHA loans, rural loans, flood insurance, taxes
WASHINGTON – Dec. 21, 2018 – Unforeseen events can challenge transactions, but an end-of-the-year government shutdown could be particularly troublesome for buyers and sellers who hope to close before 2019.
While a probable government shutdown is only partial – meaning not every federal agency is affected – agencies involved with home loans and flood insurance will be officially shut down with many employees furloughed. However, that “shutdown” can mean different things. In some cases, a program may still be operating; in other cases, buyers and sellers may have some type of work-around; in a few cases, programs are on complete hiatus until the president and Congress reach some kind of agreement.
Real estate-related government programs affected by the shutdown
A National Flood Insurance Program (NFIP) lapse makes it difficult to close on homes in flood zones if a buyer requires a mortgage because many lenders require NFIP coverage.
- Buyers may sometimes “assume” the current policy owned by the seller under certain conditions. For this to work, the seller must have coverage and be willing to transfer it. Check GR 15 in a PDF doc posted online at FEMA’s website for more information.
- Secondary lenders that purchase mortgages, such as Fannie Mae and Freddie Mac, often issue guidelines on how to handle a flood insurance lapse if a government shutdown appears to last longer than a few days. They may authorize lenders, for example, to approve loans if buyers put money into escrow and sign docs so they can get NFIP coverage as soon after closing as possible.
- FHA, Fannie Mae, Freddie Mac and VA will likely release guidelines with more information at some point on ways to proceed. During earlier NFIP lapses, the FDIC issued guidance to lending institutions, and the Federal Reserve issued informal guidance to lenders.
- In some earlier NFIP shutdowns, FEMA created a Write-Your-Own (WYO) Program. It then paid private insurance companies to write and service NFIP policies during the shutdown.
- Private flood insurance may be a good option for homebuyers, but the details of the policy become important and lenders may not accept certain coverage. In addition, a buyer who wants a private flood policy temporarily may find it more difficult to convert to NFIP later since NFIP considers “private coverage” the same thing as “went without flood insurance.”
The National Association of Realtors® (NAR) also maintains a reference page for frequently asked questions about flood insurance.
Federal Housing Administration (FHA loans)
FHA falls under the Department of Housing and Urban Development (HUD), and up to 95 percent of HUD employees may be furloughed while the government is shut down.
However, FHA lending should not completely stop. HUD’s Contingency Plan calls for FHA to continue endorsing new loans in its Single Family Mortgage Loan Program. But the agency will be short on staff during the shutdown. Existing and new FHA loan applications will likely take longer to approve and fund.
Other FHA programs will not continue, such as the home equity conversion mortgage (HECM) program – reverse mortgages. FHA also won’t make new commitments in the Multi-family Program.
FHA will, however, maintain operational activities including paying claims and collecting premiums. FHA Contractors managing the REO/HUD Homes portfolio can continue to operate.
Rural Housing programs
Rural housing programs under the U.S. Department of Agriculture (USDA), would not issue new rural housing Direct Loans or Guaranteed Loans, such as its Single Family Housing Guaranteed Loan Program. In addition, scheduled closings of Direct Loans will not occur during the shutdown.
Scheduled closings of Guaranteed Loans may continue without the guarantee previously issued and could be closed – but it would be at the lender’s own risk, according to NAR. An overview of Rural Development changes during a shutdown is posted on the program’s website.
Internal Revenue Service
Homebuyers often need tax return transcripts (Form 4506T) if required by their lender. In a shutdown, however, the IRS will close and suspend the processing of all forms, including Form 4506T.
While FHA and VA loans don’t require IRS tax transcripts, many lenders require them for various types of loans – sometimes including FHA and VA. If the government shutdown lasts longer than hoped, buyers should expect delays.
During a government shutdown, however, lenders could become more flexible if buyers can’t secure Form 4506T through no fault of their own. Some may adopt revised policies during the shutdown – such as allowing for processing and closings with income verification to follow – as long as the borrower has signed a Form 4506T requesting IRS tax transcripts.
Fannie Mae and Freddie Mac, which push requirements onto lenders who later hope to sell a loan, may also adopt relaxed provisions that allow closings to proceed subject to tax transcript verification before the GSE’s (Fannie Mae, Freddie Mac, etc.) actually purchase the loans.
Government Sponsored Enterprises (Fannie Mae, Freddie Mac, etc.)
During previous shutdowns, Fannie Mae and Freddie Mac continued normal operations, similar to their regulator, the Federal Housing Finance Agency, since they don’t rely on appropriated funds. They may introduce relaxed procedures that permit closings to go forward without federal verification of Social Security numbers and IRS tax transcripts. However, lenders would still have to obtain federal verification of both before the GSE’s agree to purchase the loans.
Relaxed requirements wouldn’t apply to loan modification re-financings. In addition, a lot is still up in the air, and behavior during earlier government shutdowns doesn’t necessarily predict how things will go under the latest shutdown.
Social Security Administration
The Social Security Administration (SSA) will close, but checks will still be processed and distributed. According to the SSA Contingency Plan, Social Security numbers will not be verified through the Consent Based SSN Verification Service during a shutdown – but Fannie Mae and Freddie Mac are expected to adopt policies that help buyers work around this problem.
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