Shutdown hits FHA loans, rural loans, taxes, more

 Unforeseen events can challenge transactions, but an end-of-the-year government shutdown could be particularly troublesome for buyers and sellers who hope to close before 2019.

While the government shutdown is only partial – meaning not every federal agency is affected – agencies involved with home loans and flood insurance have been officially shut down with many employees furloughed. However, that "shutdown" can mean different things. In some cases, a program may still be operating; in other cases, buyers and sellers may have some type of work-around; in a few cases, programs are on complete hiatus until the president and Congress reach some kind of agreement.

Real estate-related government programs affected by the shutdown

Flood insurance

UPDATE, Dec. 21: Congress passed a bill this evening extending the National Flood Insurance Program  until May 31, 2019. It still needs President Trump's signature to become law, but that's generally expected.

The bill is limited only to the flood insurance program; other programs that could be affected by a partial shutdown of the federal government, including FHA mortgage programs, are not part of the extension legislation.

Federal Housing Administration (FHA loans)

FHA falls under the Department of Housing and Urban Development (HUD), and up to 95 percent of HUD employees may be furloughed while the government is shut down.

However, FHA lending should not completely stop. HUD's Contingency Plan calls for FHA to continue endorsing new loans in its Single Family Mortgage Loan Program. However, the agency will be short on staff during the shutdown. Existing and new FHA loan applications will likely take longer to approve and fund.

Other FHA programs will not continue, such as the home equity conversion mortgage (HECM) program – reverse mortgages. FHA also won't make new commitments in the Multi-family Program.

FHA will, however, maintain operational activities including paying claims and collecting premiums. FHA Contractors managing the REO/HUD Homes portfolio can continue to operate.

Rural Housing Programs

Rural housing programs under the U.S. Department of Agriculture (USDA), would not issue new rural housing Direct Loans or Guaranteed Loans, such as its Single Family Housing Guaranteed Loan Program. In addition, scheduled closings of Direct Loans will not occur during the shutdown.

Scheduled closings of Guaranteed Loans may continue without the guarantee previously issued and could be closed – but it would be at the lender's own risk, according to NAR. An overview of Rural Development changesduring a shutdown is posted on the program's website.

Internal Revenue Service

Homebuyers often need tax return transcripts (Form 4506T) if required by their lender. In a shutdown, however, the IRS will close and suspend the processing of all forms, including Form 4506T.

While FHA and VA loans don't require IRS tax transcripts, many lenders require them for various types of loans – sometimes including FHA and VA. If the government shutdown lasts longer than hoped, buyers should expect delays.

During a government shutdown, however, lenders could become more flexible if buyers can't secure Form 4506T through no fault of their own. Some may adopt revised policies during the shutdown – such as allowing for processing and closings with income verification to follow – as long as the borrower has signed a Form 4506T requesting IRS tax transcripts.

Fannie Mae and Freddie Mac, which push requirements onto lenders who later hope to sell a loan, may also adopt relaxed provisions that allow closings to proceed subject to tax transcript verification before the GSE's (Fannie Mae, Freddie Mac, etc.) actually purchase the loans.

Government Sponsored Enterprises (Fannie Mae, Freddie Mac, etc.)

During previous shutdowns, Fannie Mae and Freddie Mac continued normal operations, similar to their regulator, the Federal Housing Finance Agency, since they don't rely on appropriated funds. They may introduce relaxed procedures that permit closings to go forward without federal verification of Social Security numbers and IRS tax transcripts. However, lenders would still have to obtain federal verification of both before the GSE's agree to purchase the loans.

Relaxed requirements wouldn't apply to loan modification re-financings. In addition, a lot is still up in the air, and behavior during earlier government shutdowns doesn't necessarily predict how things will go under the latest shutdown.

Social Security Administration

The Social Security Administration (SSA) will close, but checks will still be processed and distributed. According to the SSA Contingency Plan, Social Security numbers will not be verified through the Consent Based SSN Verification Service during a shutdown – but Fannie Mae and Freddie Mac are expected to adopt policies that help buyers work around this problem.