By Nick Timiraos
The Federal Housing Administration plays a key role providing low down payment mortgages to the housing market. Last year, it accounted for as many as half of all mortgages for home purchases, according to research firm Zelman & Associates.
The FHA is particularly popular with first-time home buyers because it requires minimum down payments of just 3.5%. The New Deal-era agency doesn’t actually make mortgages. Instead, it insures lenders against the risk of a default for loans that meet its standards.
But if the federal government shuts down, the FHA won’t be insuring any new loans. Banks will still be able to make FHA loans, but they’ll have to fund and hold onto those loans until the government re-opens for business.
A spokesman for Wells Fargo & Co., the nation’s largest mortgage originator, said that Wells “would expect to be able to take applications and close loans provided that a shutdown doesn’t continue for any extended period.”
Banks will also have to decide how they will treat their FHA-eligible loans from correspondent and warehouse channels, where they buy loans from smaller originators, including the lending units of major home builders. Wells says it is still determining how to move forward with those loans in the event of a shutdown.
The federal government could shut down if political leaders don’t approve a new budget or pass another temporary spending resolution by midnight on Friday.
Outside of the FHA, most loans are being backed by Fannie Mae and Freddie Mac, which wouldn’t be affected by a shutdown. Fannie and Freddie generally require down payments of 20% unless borrowers have mortgage insurance and have tighter standards that can make loans more expensive for certain borrowers compared to the FHA.
The last time the government shut down—for five days in November 1995, and then for 21 days from December 1995 to January 1996—the government wasn’t the main provider of liquidity to a reeling purchase market at the start of the heavy sales period. At the time, the FHA provided this bulletin to provide some answers to lenders about how it would deal with a shutdown.
Update: At a town hall discussion on Wednesday, President Obama warned that a shutdown could have an impact on the mortgage market. “It may turn out that somebody who was trying to get a mortgage can’t have their paperwork processed by the FHA and now the person who was going to sell the house, what they were counting on, they can’t get it,” he said.
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