How the Government Shutdown Is Affecting Mortgage Lending

By Audrey Decker

With the partial federal government shutdown now approaching its third week, several federal agencies have suspended all but essential operations. Federal banking regulators—the Consumer Financial Protection Bureau, FDIC, Federal Reserve, and OCC—remain open, as their funding does not come from congressional appropriations. But many federal lending programs and other functions that relate to mortgage origination and servicing have been curtailed or otherwise affected.

This article provides a summary of key mortgage-related programs affected by the shutdown.

Origination

The Department of Housing and Urban Development is closed. In accord with the HUD Contingency Plan, the Federal Housing Authority’s Office of Single Family Housing will endorse new single-family loans, but not HECM (reverse mortgages) or Title I (property improvement) loans. FHA is operating with reduced staffing, which may result in closing delays.

Ginnie Mae has reduced staffing to essential personnel levels during the shutdown. Ginnie Mae will continue to make pass-through principal and interest payments to investors and perform other essential functions, such as granting commitment authority and supporting the issuance of guaranteed mortgage backed securities. Ginnie Mae will notify issuers and other stakeholders to provide specific instructions and contact information.

The Department of Agriculture will not issue new loans or guarantees through its Rural Housing Financing program. Scheduled closings of single housing direct loans are being cancelled. Lenders that proceed with scheduled closings of single-family guaranteed loans where the guarantee was not issued before the shutdown do so at their own risk.

The Department of Veterans Affairs is fully funded for fiscal year 2019 and all VA operations will continue unimpeded during the shutdown. The processing of VA loans is considered an essential function, and VA loans are being funded and closed.

On Dec. 28, 2018, the Federal Emergency Management Agency announced that the agency would resume operations of the National Flood Insurance Program during the shutdown, retroactive to Dec. 21. Earlier in the week, FEMA had announced that it would suspend the sale and renewal of NFIP policies, despite Congress’ passage and the president’s signature of a bill to reauthorize the NFIP before the shutdown began. ABA, along with members of Congress and other trade groups, strongly objected to FEMA’s earlier decision, citing concerns that the move could complicate and potentially delay mortgage loan closings where NFIP coverage is required. ABA applauded FEMA’s subsequent decision to reinstate the program.

Social Security payments are non-discretionary spending and will continue to be made during the shutdown. More broadly, the SSA contingency plan excepts a majority of SSA employees from furlough and provides for continuation of most functions, and SSA offices remain open. The shutdown may affect mortgage lenders who need to validate Social Security numbers with the SSA using SSA-89, however. The contingency plan does not specify whether processing SSA-89 requests would be continued or discontinued during a shutdown, and it is currently unclear whether these requests are being processed.

The Internal Revenue Service is now processing requests for tax transcripts made through its Income Verification Express Service (IVES) program. IVES is used by mortgage lenders to verify income as part of loan originations. The IRS had suspended the service when the partial shutdown began. After strong advocacy with the Treasury by ABA and other trade groups, the IRS resumed the service on January 7, 2019, noting in its announcement that transcript requests may take longer to process until the backlog clears. On the same day, the IRS also announced that it will recall a significant portion of its furloughed workforce in order to process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled.

Fannie Mae and Freddie Mac are not government-funded and are operating as usual. In most cases, the shutdown will not impede the GSEs’ processing of conventional purchase loans and refinances, and both Fannie and Freddie had adopted workarounds to address certain indirect impacts of the shutdown, such as the temporary unavailability of IRS tax transcripts or SSN validation. Fannie Mae and Freddie Mac have each issued temporary guidance to sellers and servicers to assist impacted borrowers, addressing such loan origination issues as employment and earnings verification, IRS transcript requests, social security number validation and flood insurance.

Servicing

The shutdown affects nearly 800,000 government employees, with approximately 420,000 working without pay and 380,000 furloughed. Federal contractors also face loss of income on contracts.

In their temporary guidance, both Fannie Mae and Freddie Mac advised mortgage servicers that they can offer forbearance options to mortgage borrowers impacted by the shutdown, in accordance with the respective company’s existing forbearance policies.

On Jan. 8, the FHA issued a mortgagee letter encouraging servicers and lenders to extend special forbearance plans, waive late fees and suspend credit reporting on furloughed federal workers and contractors suffering a loss of income due to the shutdown.  FHA Commissioner Brian Montgomery reminded servicers are reminded “of their ongoing obligation” to offer forbearance, citing the FHA handbook.

Also on Jan. 8, Treasury Secretary Steven Mnuchin issued a statement commending the efforts of mortgage lenders, mortgage servicers, and other financial institutions working to assist those who may face financial hardships resulting from the federal government shutdown. “We applaud the actions of mortgage lenders, mortgage servicers, and other financial institutions, including Fannie Mae and Freddie Mac, that are taking steps to assist individuals experiencing temporary financial difficulties due to the government shutdown,” Mnuchin said.

During the 2013 shutdown, the CFPB, Federal Reserve, FDIC, OCC and NCUA issued a joint statement encouraging financial institutions to work with affected customers. Noting that “prudent workout arrangements that are consistent with safe-and-sound lending practices are generally in the long-term best interest of the financial institution, the borrower, and the economy,” the agencies said that arrangements that “increased the potential for creditworthy borrowers to meet their obligations” while dealing with the transitory effects of a shutdown “should not be subject to examiner criticism.” The 2013 shutdown lasted 16 days. There were no subsequent government shutdowns until 2018, with a three-day shutdown in January, a one-day shutdown in February, and the most recent shutdown commencing on Dec. 21. The banking agencies have not issued any new statements in response to these latest shutdowns, but the 2013 statement remains available on each agency’s website.

Audrey Decker is VP for mortgage finance at the American Bankers Association