If the government fails to come to debt limit terms, it could cost the mortgage industry—in a big way.
If the debt limit is not raised through government action by the deadline of August 2, the Federal Housing Administration, as a “non-essential” government agency, could go on hiatus as part of an overall government shutdown, according to a Center for American Progress report.
In the report, titled “Federal Debt Freeze Disaster Looming for Housing Market,” author David Min, associate director for financial markets policy at the Washington, D.C.-based think tank, indicates that an FHA shutdown would eliminate potential homebuyers, cause significant delays for everyone else, and would exacerbate an already struggling housing sector.
Without FHA, there would be few to no loans insured by the government agency, including the 99% of reverse mortgages it currently insures, thus it could have major implications for reverse mortgages.
When asked for confirmation that FHA could shut down under the potential debt limit circumstances, the Department of Housing and Urban declined to comment for RMD.
Whether the debt ceiling will be raised has been a topic of widespread speculation in recent weeks as President Obama has met with republican and democratic leaders to tackle the debt ceiling problem. If the ceiling is not raised before the deadline, a government shutdown would ensue.
Min says that FHA is a relatively low priority when it comes to items on the federal government’s list of expenses, and if FHA faces a freeze resulting from the debt issues, there will be very little activity for lending.
“Lenders make the loan knowing they can get FHA insurance,” Min told RMD. “What will happen is that if FHA shuts down, the approval process will be delayed as long as it is shut down. [Lenders] may see some FHA-qualifying loans happen during that period, but there’s limited capacity.”
Taken a step further, another potential outcome of a government debt default could be a change in the HMBS market.
“If government really defaulted on debt, it would remove some of the benefit to HMBS since it would get traded lower relative to other mortgage securities not backed by the federal government,” says John Lunde, president of Reverse Market Insight, noting that a default scenario is extremely unlikely. In theory, however, “[It] might close a bit of the gap with potential proprietary products, but there’s still a long way to go there. And this is the single worst way to close that gap I can think of.”
In the most recent debt talks in Washington, President Obama’s said he would oppose any short-term agreement in an effort to get past August deadline. Additionally, he said Republicans opponents will have to concede on revenues.
Written by Elizabeth Ecker