10/03/2013

What the Government Shutdown Might Mean for Real Estate in Southern California

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As of last weekend, HUD (U.S. Dept. of Housing and Urban Development) reversed its original position about loans and stated that applications for all government-backed mortgages will continue to be processed during a government shutdown, which for many California buyers means FHA loans.

But, though the loan may be processed, getting the FHA loan funded (meaning you're up to the last few days of your escrow period and ready to close) is another story.  To close an FHA loan, an IRS tax transcript (the 4506-T Form which is filed with the IRS to get your income tax information) and the Social Security Administration's verification for that buyer are needed.  The IRS is currently closed and Social Security is closed to new business.  The two closures will not affect anyone who received these items prior to the shutdown date, but to open a new loan and get it funded and closed will probably not happen during the shutdown. (NOTE: A particular FHA lender source may be willing to not require the 4506-T form itself, and be willing to close a loan without it, but not common.)  And, FHA may not have the ability to continue any loans beyond another two months in the future if the shutdown continues.  But we're not there yet.

But with FHA currently providing the majority (approximately 80%) of California buyers with their home purchase loans, there will be probably an impact to at least some parts of the California and Long Beach area real estate market, and certainly to many prospective California buyers.

Fannie Mae and Freddie Mac loans will not be affected because they are funded by fees from lenders, not by government appropriations.  Freddie Mac stated it will not require the 4506-T Form to be processed by the IRS, but that the information be provided as part of the loan.

VA loans are supposed to continue at this point, but there could be some delays with those loans.

While "economists" believe that there will be minimal impact overall, this shutdown could go on into the upcoming debt ceiling issue, and as certain legislators continue to balk, so probably the rate of home purchases.  "Research firm Capital Economics predicted that the effect of a shutdown would be minimal provided that it doesn’t presage a fight over the upcoming debt ceiling increase."  See more at DSNews .

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