1995 was the last time that our government had a shutdown. I remember that it was a painful time for pretty much everyone… but it wasn’t a panic. If it happens again this time… things may be a bit different but I expect many of the same issues will resurface just in a different way. At our company we are preparing for a worst case scenario. If better we will all rejoice! We are preparing all the loans in our pipeline and working closely with buyers and agents that are working on new contracts, so the disruption will be minimal. Often, setting the appropriate expectations makes all the difference. So then, these are the top six areas that will be affected IF a shutdown were to occur:
- FHA Case Numbers: When an FHA loan is submitted for processing, the first thing ordered is a case number. This is needed to order the appraisal. It is important to note that the new FHA guidelines require a fully executed sales contract priorto the ordering of the case number. With a shutdown, we may not be able to order case numbers. Therefore it is critical for you to let us know when your contracts are ratified, so that we can order the case number immediately and not risk the loan (your sale) being on hold during the shutdown. However, the ability to close the loans may still be in question. This all depends on whether HUD keeps their website up and running during the shutdown. In addition to case number requests the HUD website is also used to run CAIVRS, EPLS and ADP searches. (During the 1995 shutdown, case numbers could not be obtained nor the other searches completed since everything was manual.) The 1995 shutdown only caused a delay rather than a drop in FHA Origination, but if lenders choose to stop accepting FHA applications, we would see a problem. It is my opinion that we will see some delays, but not a complete shutdown on FHA loans.
- VA: I expect to see disruption, rather than a shutdown. For like FHA we are dependent on the VA Portal website to order appraisals, receive appraisals and verify or issue certificates of eligibility. We are actively counseling our agents to be sure to refer their VA buyers earlyso that the Certificates of Eligibility can be ordered and any items such as verification of disability (to waive the funding fee requirement) can be completed. VA like FHA requires CAIVRS, EPLS and ADP searches. Those can also be completed in advance to avoid a possible delay. If the website were closed during the shutdown we would see delays on all VA loans.
- USDA: During a shutdown, the USDA office would be closed. Since USDA has government underwriters that insure behind the lender- with a shutdown we would see delays in ALL USDA loans.
Items affecting ALL loans- including conventional loans:
- FEMA: Homes in a Flood Zone: During a shutdown, FEMA would be closed. Therefore, flood insurance could not be ordered and received to insure properties that are in a flood zone,. Without flood insurance these transactions would not close.
- IRS 4506 Transcripts: Each loan requires verification from IRS that the income provided to the lender on the customers tax returns is as presented. In a shutdown, this process would be delayed or come to a halt if IRS employees are not at work to provide the information.
- SSI verifications: Investors require that each customer’s social security number be verified through the social security department. During a shutdown it is likely that social security offices will be closed. Without this verification, there will be a delay.
- Government Employee Employment Verification: In the case where the buyer works for a government agency, there would be a delay in closing, even if an Employment Verification were already in the file, since lenders are charged to provide a verbal verification employment prior to funding. If the government were to shutdown we would be unable to provide the verification and there would be a delay.
Things for you, your buyers and the lender to discuss:
- What can be done in advance to avoid a delay?
- How could this affect the rate lock? Should a buyer lock for a longer term? Wait to lock – float??
- How will the Seller handle a possible extension request?
We cannot avoid all potential pitfalls… Stay tuned for updates on this critical issue. Be sure to ask your lender on how they are planning to keep the loans moving… Do they have a proactive approach to this potential for closing delays.
As always your comments are welcome…