Government Shutdown Would Impact Mortgages

Posted by on Sunday, September 29th, 2013 at 3:31pm.

Home buyers should know that the mortgage market is not exempt from the impact of a possible government shut down, which the U.S. faces perhaps as soon as Tuesday if lawmakers do not agree on spending cuts.

On a positive note, home owner who are pursuing mortgages bought and backed by Fannie Mae and Freddie Mac can feel relieved. Those mortgages would not be affected because those companies rely on fees from loans to keep their operations going, not on government money. Luckily, Fannie Mae and Freddie Mac-backed loans comprise the majority of loans as of late.

However, home buyers pursing loans backed by a government agencies like the Federal Housing Administration should keep a sharp eye on government decisions this week. Any of these loans that aren’t approved when a shutdown kicks in likely won’t be fully processed at all.

Government shutdowns are rare – with the last one being in 1995. However, in recent years the U.S. government has come very close to a shutdown several times. So, even if the Obama Administration averts a shutdown this week, we’re likely encounter a threat of a shutdown in future years.

So homeowners should understand that their government-backed mortgage may be affected by the broader condition of the U.S. financial operations. But the ripple effects could easily affect other homebuyers in an increasingly competitive market for mortgages.

If a shutdown triggers a halt to the mortgages backed by government agencies, that would close a channel of mortgages that accounted for at least 45% of loans in 2012, according to the Federal Reserve. Afterall, the FHA already insures about 60,000 loans per month.

So, reduced access to these loans, combined with the increasingly tight lending standards financials institutions are employing in the waking of the housing market bubble burst, would likely result in an even more difficult environment to nab a home loan.

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