Agencies issue shutdown-related guidance for lenders

A government shutdown arrived Wednesday due to an intense partisan divide in budget negotiations, prompting bond investor activity that could lower mortgage rates but otherwise challenge the housing market.

Investors flooded further into the perceived safety of treasury bonds, putting downward pressure on rate-indicative yields as several government agencies pulled back "non-essential" services related to housing and furloughed workers, with potential for layoffs.

The 10-year yield typically correlated with the most common mortgage type was trading near 4.1% at deadline Wednesday morning, down from 4.15%. A slow private payroll report, which could carry additional weight if the public one Friday gets delayed, contributed to the drop.

However, some experts forecast that mortgage rates could rise if the shutdown persists over an extended period of time.

"Rates initially won't be impacted by the shutdown; however, if it drags on, then investors will raise fears about the credit quality of U.S. debt, bond yields could go higher," Melissa Cohn, regional vice president at William Raveis Mortgage, said in a press statement.

What follows are some of the agencies and groups that have released guidance or reacted to the impacts of the shutdown on housing:

Fannie Mae and Freddie Mac workarounds for government shutdown

Influential government-sponsored enterprise loan buyers Fannie Mae and Freddie Mac — which operate outside the federal budget process but interact with many public entities — set up several contingencies reflective of broad mortgage concerns.

The GSEs announced they were offering leeway and workarounds on borrower data verifications like paystubs, financial reserves, Internal Revenue Service transcripts, Social Security numbers.

The enterprises anticipate most government employees can have their employment verified through automation services or third parties. Where even verbal VOEs are not available, written statements documenting efforts to obtain VOEs and related challenges may be submitted.

Some time limits on paystubs are waived. If the shutdown impacts loan applications from Nov. 3 on, borrowers must have two months of documented reserves, or as required by manual or automated underwriting, whichever is greater. Some loans will have additional overlays.

The enterprises may allow certain forms of alternative tax information to be used if IRS transcripts aren't available. Where Social Security verification is necessary, lenders have to obtain it at some point before delivery of the loan, according to Fannie.

The IRS on Oct. 2 confirmed previous industry expectations that it planned to keep its Income Verification Express Service, a key channel through which transcripts are available, up and running.

"We do not anticipate any impact on to the IVES program or processing timeliness due to the government shutdown," the IRS said in an emailed statement.

Fannie Mae and Freddie Mac also are allowing servicers to extend forbearance to impacted borrowers.

Furloughs should generally not preclude the GSEs from purchasing and securitizing a borrower's loan, but Freddie noted that this is contingent on the seller having "no knowledge that the borrower will not return to work after the shutdown ends" and fulfilling other documents.

Service limits at the Federal Housing Administration

The Federal Housing Administration's Office of Single Family Housing announced that "some of its mortgage insurance programs will be operational but with limited services."

Insurance endorsements for FHA's core Title II traditional mortgage program will be available. Some functions supporting condo lending will be available but others will not. Endorsements for new reverse mortgages, Title I program and HUD employee loans will be unavailable, according to the FHA.

Several automated services, including customer service channels, will be operational but online FAQs won't be updated and any related staff intervention will be limited.

Lenders and third parties like appraisals or consultants that work with the 203(k) program can and should proceed with approvals and recertifications as required or possible but submissions will not be reviewed.

Many servicing, claims and asset management functions will be available with the exception of new applications for principal broker name and address identification numbers. 

The FHA also reminded servicers to engage in early default intervention for impacted distressed borrowers like furloughed employees by offering options like forbearance, repayment plans or permanent loss mitigation options in line with current policy.

The National Fair Housing Alliance decried HUD's shutdown of enforcement and oversight related to Fair Housing Act and "responsible" artificial intelligence use.

FHA noted in a bulletin that its "actions and decisions about the operations that continue are governed by the U.S. Constitution, statutory provisions, court opinions, and Department of Justice opinions, which provide the legal framework for how funding gaps and shutdowns have occurred in recent decades."

Contingencies for federal flood insurance policies

The American Land Title Association urged a resolution to a lack of authorization for federal flood insurance that plays a key role in lending, noting that is leaves "millions of Americans unable to obtain or renew flood insurance policies, jeopardizing home sales."

Regulatory agencies for federal financial institutions collectively re-released past guidance allowing lenders to "continue to make loans that are subject to the federal flood insurance statutes when the National Flood Insurance Program is not available."

However, lenders "must continue to make flood determinations; provide timely, complete, and accurate notices to borrowers; and comply with other applicable parts of the flood insurance regulations," according to that guidance.

Lenders also "should evaluate safety and soundness and legal risks and should prudently manage those risks during the lapse period," the interagency guidance stated. 

The growth of private flood insurance may help lenders contend with the NFIP shutdown in some instances, but could still leave gaps in higher-risk areas.

Fannie and Freddie also have flood insurance contingencies.

'Core functions' get support at Ginnie Mae

Ginnie Mae issued a statement indicating it will "continue to perform all functions necessary to ensure there is not a disruption" in the multitrillion-dollar mortgage-backed securities market it guarantees.

Functions that remain operational include those that ensure timely payment of principal and interest to investors, commitment authority, and issuance of MBS and real-estate mortgage investment conduits. MBS issuance includes related pools issued for immediate transfer.

The support for issuance is contingent on the backing that other government agencies like the FHA provide at the loan level.

The U.S. Department of Agriculture's Rural Housing Service, which is one of those agencies, had suspended updates on its website for the duration of the shutdown. Another agency, the Department of Veterans Affairs, was partially shut down but indicated that housing would be among benefits that would "continue to be processed and delivered."