Federal Budget Shutdown Threatens FHA

While a shutdown would mean that the Federal Housing Administration will suspend new guarantees of mortgages, it probably won’t change things very much.

FHA guaranteed loans are very important right now. FHA and VA constituted approximately one-third of new mortgages up in 2010, and most of that was from FHA. FHA raised its premiums and this dampened the appetite for those loans. For many buyers, an FHA loan is the only real choice. FHA will guarantee loans with a loan-to-value of as much as 96.5. By comparison, many lenders expect borrowers to put at least twenty percent down in order to qualify for a conventional loan.

FHA guarantees are deemed a non-essential service.

Even as the FHA says that it will close for the interim of the impasse, this may not matter that much for the actual availabilty of FHA loans. Lenders can still originate FHA loans. When they do so at a time when FHA is not processing loans, the risk will is theirs. It is possible that lenders will stop making new FHA product. It is also possible that mortgages schedule to close will be canceled.

Even if the FHA program is suspended, it seems that many lenders will take the risk rather than give up new business. Wells and Bank of America have already said that they will go ahead with new FHA loans. In the meantime, they will hold them on their books. They have the flexibility to do that, but can the same be said for smaller institutions?

The real story may be that the government shutdown serves to give the big banks an unexpected competitive advantage.

Shutting down the government is certain to mean that there are no happy campers, but it won’t deter many people from buying a home with an FHA mortgage.