The shutdown is delaying loans around the country. And some experts warn… (Patrick T. Fallon, Bloomberg )
Jay Joerger was set to close a long-planned sale of his Palm Springs condominium this week until he was blindsided by an unexpected problem: the shutdown of the federal government.
The condo sits on land owned by an Indian tribe, so the sale must be approved by the U.S. Bureau of Indian Affairs. But the bureau has ceased nonessential functions, delaying many home sales in Palm Springs and nearby areas.
"It's stopped cold right now," said Joerger, a painting contractor from Fullerton. "I'm dumbfounded."
The government closure that ended its second week Friday is beginning to weigh on one of the most important parts of the U.S. economy — the housing market.
Housing lenders rely on a variety of government data, such as verification of borrowers' income, which are unavailable with the partial closure of the Internal Revenue Service and other agencies.
The mortgage industry has found creative ways to work around the shutdown. Banks are getting data from other sources. Sometimes they're simply taking the risk of making loans without some information.
Nevertheless, the shutdown is delaying loans around the country. And some experts warn that home lending could be much more severely disrupted if the political stalemate in Washington persists much longer.
"How much momentum are our fragile housing markets going to lose?" said Debra Still, chief executive of Pulte Mortgage and head of the Mortgage Bankers Assn. "The longer we're shut down, the more it'll negatively affect housing."
The biggest effect so far has been on nontraditional specialty loans.
Many FHA-backed reverse mortgages and property improvement loans have run into trouble. So have home loans in rural areas that are guaranteed by the U.S. Department of Agriculture.
Most jumbo loans are going through. But a few providers are declining to write them without IRS tax transcripts. Jumbos are loans that are too big to be backed by housing finance giants Fannie Mae and Freddie Mac or by the Federal Housing Administration.
The fear is that more types of loans will be affected by a prolonged shutdown. For example, the availability of FHA loans, a key source of lending throughout Southern California, could be threatened because most agency workers have been furloughed, experts say.
Lenders are continuing to use automated systems at Fannie, Freddie and the FHA to process loans, and so far delays have been slight, bankers say. But they can do that for only so long before backlogs develop.
As for income verification, many lenders are writing mortgages without getting tax returns from the IRS. Instead, they have the borrowers show them the returns, which they plan to confirm with the IRS when the agency fully reopens.
For the time being, banks are funding deals themselves. They can't sell the loans to Fannie and Freddie, as they normally do. Lenders run the risk of being stuck with a bad loan if the borrowers lie about their income.
"If it turns out to be absolute fraud, then we own the loan and we'll have to deal with it," said Fred Arnold of American Family Funding in Santa Clarita.
Nevertheless, some buyers are being tripped up.
The partial closure of the IRS has thrown a monkey wrench into one couple's plan to buy a three-bedroom house in Chino Hills.
A credit problem that was unrelated to the shutdown prevented the newlyweds from closing on Sept. 23, as they originally planned, said their agent, Terry Muñoz at Century 21 Allstars in Pico Rivera.
The couple declined to comment. Their failure to close on time forced them to pay a $100 daily penalty to the seller, Muñoz said.
She said they've gotten a family member to co-sign for the loan, but the relative's income can't be verified until the IRS fully reopens. The loan is stuck and the newlyweds are still paying the penalty.
"There is nothing we can do until the IRS checks it," Muñoz said. "They are not happy but they are going to pay."
Some home buyers have adjusted their plans to avoid shutdown-related problems.
Helga Lupu said she is shelling out an extra $4,800 in mortgage fees to be assured of closing on a home in the Rancho Peñasquitos area of San Diego.
The 78-year-old retiree got approved by one lender before later finding a rival bank that would charge lower fees. But the second bank hasn't confirmed her tax returns with the IRS. So she's sticking with the first lender.
"There was no hope that we would get the IRS approval within the next couple of weeks," Lupu said. "There is nothing I can do about it."
Joerger, the painting contractor, spent nearly two years trying to finalize a short sale of his two-bedroom condo near downtown Palm Springs.
He was set to close the sale Wednesday, which was the short-sale deadline approved by his bank. Joerger hopes that his bank will grant him an extension because of the Bureau of Indian Affairs' partial closure.
But there's no guarantee, said his real estate agent, Jim Franklin.
"The public doesn't understand that this is going on," Franklin said. "Deals that affect people's lives aren't going to happen because of the government shutdown."