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Sequester, shutdown and your loan

By Polyana da Costa · Bankrate.com
Friday, March 1, 2013
Posted: 10 am ET

Homebuyers and refinancers who are in the process of getting a mortgage should keep an eye on Washington in coming days. Budget cuts and a potential government shutdown could get in the way of your loan closing if Congress doesn't get its act together in time.

When $85 billion in mandatory federal spending cuts kick in today, thousands of government employees will get notices of furlough. That may include staff at the Federal Housing Administration, which insures FHA loans.

Furloughs would go into effect on April 1, unless Congress prevents or reverses the budget sequester in time.

"It is going to get bumpy if the FHA hours are furloughed for longer than a few weeks," says Brett Sinnott, secondary marketing director at CMG Mortgage Group in San Ramon, Calif.

The furloughs alone won't mean that borrowers won't be able to close on FHA loans, but could eventually translate into delays for borrowers, Sinnott says.

The FHA is part of the Department of Housing and Urban Development, which has 9,000 staffers in 80 field offices across the country.

"The public will suffer, as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties," HUD Secretary Shaun Donovan recently told a Senate committee.

Veterans Affairs loans wouldn't be affected by the cuts because the VA is exempted from the sequester, according to a spokesman at the Department of Veterans Affairs.

What if there is a government shutdown?

But the sequester is just the tip of the iceberg. Temporary funding is keeping the government running; it expires on March 27. Since Congress has not agreed on a budget for the fiscal year, if the bill isn't extended or replaced, federal government offices could shut down.

"A government shutdown is scary because all mortgage agencies (Fannie Mae, Freddie Mac and Ginnie Mae) would most likely incur huge delays across all channels of the business," Sinnott says.

In April 2011, the government dodged a shutdown at the last hour, as HUD staff held meetings to prepare for a closure.

At the time, lenders said they would still be able to process FHA and VA loans in the short term, even if there were delays in insuring the loans. But the day before that impending shutdown in 2011, HUD warned it would pull the plug on FHA's loan-processing system if the government was forced to close its doors.

The last time there was a government shutdown was during former President Bill Clinton's administration, in late 1995. The closure lasted about three weeks.

Some lenders say they are not worried about a potential shutdown yet because they assume Congress will reach some sort of last-hour agreement, as usual.

Plan ahead in case Congress leaves you in the lurch

Still, borrowers should plan accordingly, in case lawmakers fail to do their jobs.

"We are under the impression the government has some common sense to avoid this," says Rob Nunziata, president of FBC Mortgage, in Orlando, Fla. "Chances are nothing will happen, but it's a good idea to get things going to make sure you can close in case something happens."

Even if furloughs or a potential shutdown result in only minor delays, that could mean a higher rate for borrowers if a locked interest rate expires as a result, Sinnott says.

"The best solution to avoid any frustration is to close any loan you have as soon as possible. With the rate spike we saw last month, most lenders have the capacity to get loans through the process quicker due to lower volume levels," he says.

If you want me to keep you posted on this, follow me on Twitter @Polyanad.

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6 Comments
Eloise Garland
September 26, 2013 at 9:29 pm

I have a loan that has been sent to USDA and I am waiting for them to ok it.If there is a government shut down on Monday what will happen to my loan.

Mike in GA
March 05, 2013 at 4:18 pm

Someone once told me - Don't miss a good rate looking for a great rate.

Jim Vaughn
March 01, 2013 at 11:57 am

So I have the opportunity to lock my USDA loan TODAY 2/1/13 at 3.5%. However, the rates have been dropping the past 2 weeks. Im considering holding out till next week to try and get a little lower rate. Anyone have any advice?
Other than "dont get greedy"

Thanks !!

End the Ponzi Scheme
March 01, 2013 at 11:45 am

So how could the FHA do its jobs last year? The cut is to the increase in spending, so the FHA has more to do its job this year than last. Apparently it can't do the job for the same cost this year.