HUD's Donovan:'Very Concerned' Over Mortgages In Shutdown

WASHINGTON — Housing and Urban Development Secretary Shaun Donovan on Thursday stepped up warnings that the housing market could be dealt a blow if the federal government shuts down, seeking to build pressure on lawmakers to reach a budget agreement.

Donovan told Senate lawmakers that he is "very concerned" that a government shutdown could force lenders to stop making loans backed by the Federal Housing Administration, a government agency that insures home mortgages.

"This is the worst time that we could introduce that uncertainty into this fragile housing market," Donovan told a Senate subcommittee.

The FHA, part of the Department of Housing and Urban Development, doesn't issue loans directly but provides a federal guarantee against default. It has been a key source of funding since the housing market went bust, particularly for first-time buyers. The agency backed about 20% of new loans last year, including about 40% of those made for purchases.

If the federal government shuts down, the FHA won't insure new loans. Banks will still be able to make FHA loans, but some might hold onto those loans until the government re-opens. While some large lenders may take this risk, others could be forced to cancel pending loans and stop making new ones.

"I am very concerned that a significant number of lenders would not choose to close on those loans," Donovan said.

In an interview, Donovan added that it is the "height of irresponsibility to play games with...the dreams and aspirations of families."

Two senators, Susan Collins, R-Maine, and Patty Murray, D-Wash., said the potential shutdown could affect both home buyers and sellers. "The ripple effects go on and on and that's why we simply must resolve this issue," Collins said.

However, the government appeared to be headed toward a shutdown Thursday morning after negotiations between Democrats, Republicans and the White House appeared to have flagged overnight.

Outside of the FHA, most loans are being backed by Fannie Mae and Freddie Mac, which wouldn't be affected by a shutdown. Fannie and Freddie generally require down payments of 20% unless borrowers have mortgage insurance. The two companies, which have been under federal control since September 2008, wouldn't be subject to a shutdown as they remain legally separate from the federal government.

The FHA is popular with first-time home buyers because it requires minimum down payments of just 3.5%.

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