WASHINGTON The U.S. government shutdown will soon begin to delay the approval process for mortgages and could threaten the nascent housing recovery if it stretches to mid-October or beyond.
Because thousands of federal workers have been furloughed, lenders are not able to verify borrowers' income and other data with the Internal Revenue Service and Social Security Administration, making it difficult to authorize loans.
That combined with lost income of some potential purchasers who have been furloughed and a general increase in economic uncertainty tied to the shutdown could all hurt a housing market recovery that had already cooled a bit because of higher borrowing costs.
"It is the most pressing concern from mortgage lenders on Main Street right now," said Robert Zimmer with Community Mortgage Lenders of America. "The mortgage application stream will significantly slow down if the shutdown goes on a couple more days."
A looming congressional fight over raising the nation's debt ceiling by mid-month could add to the turmoil if investors become wary of the potential for a default and interest rates shoot higher.
The government closure will also lengthen the wait for borrowers seeking mortgage insurance from the U.S. Federal Housing Association, which backs about 15 percent of new loans.
Only 64 of the FHA's 2,972 workers are on the job, with only about 30 of them dealing with loan endorsements and single-family properties.
"At a time when lenders are seeing business start to fall off a bit, the delay could cause a ripple effect," said Brian Koss, executive vice president at Mortgage Network Inc., a retail lender based in Danvers, Massachusetts.
Koss said his company spent the last couple of weeks planning for the government closure by pressing the fast-forward button on ordering government documents for home loan closings.
But a long shutdown without enough FHA workers to verify buyer data will begin delaying some loan approvals, he said.
"The skeleton (FHA) crew is nowhere near the support staff that they typically have on hand," said Mortgage Bankers Association President David Stevens, a former FHA commissioner. "It's going to create backlogs and the likelihood for slowdowns in the process is very high."
The shutdown is also likely to gum up the works for loans backed by Fannie Mae and Freddie Mac. The two firms are making extra efforts to tell lenders what verifications are needed during the shutdown.
Although those two government-controlled mortgage market giants will continue normal operations, lenders worry they might have a difficult time meeting their tough loan standards since they won't be able to verify borrowers' incomes with IRS tax transcripts.
The inability to verify Social Security numbers with the SSA could also cause problems.
About 90 percent of all new home loans are underwritten, backed or owned by government housing agencies, and Fannie Mae and Freddie Mac, the two biggest, account for more than half.
The U.S. Department of Agriculture, which also offers mortgage guarantees as part of its mission to develop housing and business in less populated areas, has canceled loan closings during the shutdown - yet another factor that will weigh on the market.
"We're going to see this worsen as the days go on," Stevens said.
(Reporting by Margaret Chadbourn; Editing by Ken Wills)