Washington Dysfunction Shutting Down Housing Market Recovery

Friday, 11 Oct 2013 10:58 AM

By Michael Kling

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The ongoing government shutdown is smothering the housing recovery, real estate experts say.

Because the IRS and Social Security Administration are closed, lenders cannot obtain critical income verifications needed for loan approvals. The Federal Housing Administration, operating on a skeleton staff, has slowed loan approvals, and the Department of Agriculture, which backs mortgages in rural areas, has shut down and is not considering new mortgages, according to MarketWatch.

The longer the shutdown lasts, the worse the impact on housing will be, lenders warn. With no mortgages, home sales will dry up and home prices will fall.

Editor’s Note:
Opinion: Retirees to Be Hit With Social Security Cuts

"The momentum in the housing market appears to be lost, especially going into the slower fall season," writes real estate expert Louis Cammarosano on his blog, Smaulgid.com.

The most likely scenario, in his opinion, is that Washington politicians will extend short-term funding to keep parts of the government open and pay interest on the debt, Social Security and Medicare payments after the Oct. 17 debt ceiling deadline.

President Obama and Congressional Democrats would agree to cut spending or increases in future spending in exchange for the House Republicans agreeing to raise the debt ceiling. Under that scenario, interest rates would remain low, helping the housing market recover.

"Unfortunately, some steam has already been let out of the recent housing bubble and it will take more than just low rates and a continuation of quantitative easing to push the housing market higher," says Cammarosano, former general manager of online real estate company HomeGain.

If the government does default, interest rates would skyrocket and economic activity would grind to a halt. Not only would the housing recovery end, home prices would probably fall, he predicts.

Lenders are becoming increasingly concerned as the shutdown continues.

"The first day we weren’t too concerned, but now we are a week in and procedural issues are starting to affect more loans," Mark Goldman, a loan officer at mortgage brokerage C2 Financial Corp., told MarketWatch.

Fannie Mae and Freddie Mac said lenders could close on loans if they obtained borrowers' signatures verifying their incomes, and then later confirm those figures after the IRS reopens. But some lenders, MarketWatch reports, are not closing loans because they would have to have to buy back loans from Fannie or Freddie if borrowers provided inaccurate incomes.

As the shutdown continues, borrowers' rate locks may expire, forcing them to pay additional fees for rate lock extensions, lenders warn. Homebuyers may lose home purchases, as buyers under pressure to sell opt to go to all-cash buyers.

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

Related Stories:

Government Shutdown Seen Threatening Housing Recovery

Forbes: Government Shutdown Could Trim the Sails of the Housing Recovery

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