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Memory Lane: How the '95 Government Shutdown Affected Banks

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If the budget impasse forces a government shutdown, most of the federal banking agencies will remain open for business since they are self-funded. (The Federal Housing Administration is a notable exception, and HUD Secretary Shawn Donovan warned Thursday that a pause in FHA-backed loan originations would harm the fragile housing market.) But a trip to American Banker's archives reveals that a federal shutdown can affect banks in other ways.

During the shutdown that lasted several weeks in December 1995 and January 1996, banks were granting extensions on loan payments, and making short-term loans, to tide over furloughed government employees. Many extended the assistance as a courtesy to good customers, though lawmakers certainly encouraged them to do so. (Click on that story and you'll see that even 15 years ago Republican lawmakers loved to use the phrase "unintended consequences.") One Washington-area savings bank even paid the lighting bills for Mt. Rushmore on behalf of the National Park Service for a time.

And FHA lenders indeed suffered during the shutdown. For the most part, they couldn't get case numbers for new loans. And when they did, lenders took some risk in closing the loans, since they didn't know when the government would reopen, and a loan had to be submitted to FHA within 60 days of closing to receive insurance. Donovan's predecessor complained at the time that HUD was unable to sell properties it had foreclosed on — something it has a lot of today — and couldn't pay claims on defaulted loans, among other problems.

This year is American Banker's 175th anniversary, and we're proud of our history and our long tradition of covering the banking industry in depth. Though we have to admit we blushed when we came across this headline from November 22, 1995, a few days after the government reopened following an earlier, shorter shutdown: "Lenders, Brokers Relieved that Federal Shutdown Was Short-Lived." Relieved? No kidding, Columbo.

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