Now that the Government shutdown is in its fourth week, it’s time to take a look at its possible effects on the mortgage industry. As it was initially assumed that this shutdown would mirror most previous shutdowns, most did not expect the protracted impasses we seem to be at, with no real end in sight to the shutdown. As the shutdown lingers, its effects increase.
The first thing impacted by the shutdown was the ability for mortgage lenders to obtain 4506-T’s. A 4506-T is an IRS form that allows mortgage lenders to obtain transcripts of past tax returns that the IRS has on file. Mortgage lenders will use this transcript to verify the accuracy of tax returns provided by the borrower. Current guidelines generally only require the execution of a 4506-T on files that require full tax returns to be provided (ass opposed to W-2s). Luckily, most borrowers do not need to provide full returns. The exceptions to this would be for self-employed borrowers, or those with rental income form investment properties, among others.
That ability has, albeit controversially, been restored. The IRS recently, due to pressure from lenders, recalled some furloughed employees in order to process the 4506-T requests sent in by lenders. While some find this somewhat unfair, it has allowed lending to begin again for those borrowers for which a fully executed 4506-T was required.
The next item that the shutdown has affected is USDA loans. The USDA loan is a Government insured loan for lower income borrowers is geographically designated rural areas. These loans are an excellent choice for first time home buyers, as they require no down payment, have flexible credit guidelines, and require a much lower monthly mortgage insurance payment than other low down payment loans. Because these loans require USDA approval, lenders are not currently able to close them until the Government reopens. This is especially damaging for first time home buyers as they often don’t have any other choice for a mortgage. That leaves sellers to decide if they will wait for the Government to reopen, or regrettably have to move on to another buyer who isn’t utilizing the USDA loan program.
While not a direct result of the shutdown, mortgage rates may be impacted by the shutdown if it continues for much longer. The market that controls the rates that lenders can offer can be influenced by the overall economy. As the economy falters, and the stock markets sink, investors will flee to the security of mortgage backed securities. That will result in a dip in mortgage rates. So while the shutdown is certainly bad news for the overall economy, it may be good news for mortgage rates, at least in the short term.