Loans will be approved at slower pace unless impasse drags on
Despite reports to the contrary, the Federal Housing Administration will not stop processing loan applications in the event of a government shutdown at midnight tonight.
In what appears to be a reversal of an earlier position stated last week, the U.S. Department of Housing and Urban Development (HUD)’s Office of Single Family Housing will continue to endorse new loans “in order to support the health and stability of the U.S. mortgage market” should there be a lapse in appropriations, the agency said in its latest contingency plan.
“The single-family aspect of FHA is funded through multiyear appropriations,” a HUD spokesman told Inman News. Therefore, while there will be some reductions in staff and furloughs, that part of the FHA will be able to operate, albeit “at a slower pace,” he said.
FHA’s multifamily operations, on the other hand, are funded on a year-by-year basis, and therefore “while FHA will be able to endorse new mortgages, it will not be able to underwrite them.” No condo projects would be approved during a shutdown.
HUD has yet to determine how much of a delay single-family loan applications will suffer or what the exact long-term impacts of an extended shutdown could be, the spokesman said.
“Because we are able to endorse loans, we don’t expect the impact on the housing market to be significant, as long as the shutdown is brief,” HUD said in its contingency plan. “If the shutdown lasts and our commitment authority runs out, we do expect that potential homeowners will be impacted, as well as home sellers and the entire housing market.”
“We could also see a decline in home sales during an extended shutdown period, reversing the trend toward a strengthening market that we’ve been experiencing.”
HUD does not yet have a date when it expects its authority to approve new loans to run out.
FHA-insured loans, available to borrowers making down payments of as little as 3.5 percent, currently comprise 15 percent of the mortgage market. Most other mortgages are destined for securitization by Fannie Mae and Freddie Mac, which require that borrowers putting down less than 20 percent obtain private mortaage insurance.
Should there be an FHA freeze, mortgage retailers, wholesalers and private mortgage insurance companies will be able to process loan applications, said Inman News columnist and mortgage broker Lou Barnes.
FHA comprises about 20 percent of his Boulder County, Colo.-based firm’s business, but he notes that FHA could back more than half of loans in certain rural areas.
Barnes said private mortgage insurers “have loosened overtight underwriting, especially in strong markets where foreclosure risk is if anything below normal,” he said.
Nonetheless, private mortgage insurance is not available to all who are eligible for FHA mortgage insurance, Barnes said.
“FHA is easier on (FICO credit scores), the amount and structure of income, the size and source of down payments, and co-signatures,” he said. “The people shut out would be the most vulnerable.”
Barnes estimates that perhaps half of FHA current production would not meet the tighter underwriting criteria of private mortgage insurers.
Bob Quint, chief financial officer for private mortgage insurer Radian, more or less agreed. He said Radian could “certainly take up the slack” in case of an FHA halt — but only if the loans meet underwriting criteria for both Radian and government-sponsored enterprises (“GSEs”) Fannie Mae and Freddie Mac.
“We estimate that about little less than half of the current FHA business meets that criteria, so I think that is a rough estimate of the volume that our industry can absorb. The ones that don’t meet the GSE criteria would unfortunately be out of the market if the FHA closes down,” he said.
Radian generally adheres to the GSEs’ underwriting standards because almost all of its business is on loans sold to the GSEs, the company said.
The staff of HUD’s Office of Housing will be severely pared down in the event of a shutdown, from 2,972 workers today to 68.
This skeleton crew will be in charge of administering FHA’s portfolio of loans, including underwriting and approving new loans, collecting premiums, paying claims and responding to questions, as well as handling HUD’s rental assistance programs.
FHA’s underwriting program, Total Scorecard, will be available, so lenders will be able to close loans.
“All FHA underwriting and processing requirements would remain in force during the government shutdown and no loan may proceed that cannot fulfill those requirements,” HUD said.
The agency advised homebuyers to contact their lender for the exact status of their FHA loan.
Tim Harrison, an executive at Upland, Calif.-based Broadview Mortgage, said he would expect little to no impact on his FHA buyer clients from a shutdown.
“[I]n the past, we as lenders underwrite and fund the loans and hold them on our books until we can get FHA to insure them when the government starts up again. So basically there should be little to no impact unless it turned out to be a very long shutdown,” Harrison said.
Nonetheless, he worried about getting FHA case numbers from HUD’s automated system, FHA Connection.
“If there are not enough people at HUD managing the online registration system when it breaks as it does we could have issues getting case numbers. We can’t underwrite or get appraisals if we don’t have a case number,” he said.
HUD said lenders will be able to obtain FHA case numbers from FHA Connection, but that other systems that interface with FHA Connection ”may not be available, or if available these other systems may not be fully supported so FHA Connection processes may not be fully functional. At this time we do not have complete information on the potential impact on some FHA Connection functionality.”
For now, Barnes expects sellers to bear with any processing delays.
“Mortgage operations are terribly tangled by excessive ‘compliance’ issues. The public (is) very patient with us,” he said.
Nonetheless, a competitive market could mean that FHA homebuyers would be at a disadvantage in a multiple-offer situation, according to John Esplana, partner and mortgage planner at Bank of Commerce Mortgage in California’s Silicon Valley.
“Part of a winning offer is making sure you close as soon as possible and on time,” he said.
Copyright 2013 Inman News