The Government Shutdown and the Effect on Mortgages

The short-term agreement that ended the partial government shutdown and raised the debt limit ceiling, reached by Congress and signed by President Barack Obama, was greeted by a collective sigh of relieve by the mortgage industry.

The immediate reaction by mortgage markets saw an immediate moderation in mortgage rates. Conventional mortgage rates for 30-year fixed rate mortgages were up to 4.625 percent before the agreement was reached. After the agreement was inked, the rates on 30-year fixed rate mortgages came down to 4.25 percent with no points.

FHA mortgages were pricing around 4.25 percent to 4.375 percent before the agreement. Post debt-ceiling gridlock, FHA rates on 30-year fixed money was around 3.75 percent. This represented an improvement of more than 50 basis points.

If the debt ceiling was not raised, and the government defaulted on its debt, the markets would have been turned on their heads. Interest rates would have skyrocket that quickly. The only folks who disagreed with this dire assessment were the self-proclaimed economists of the Tea Party, which engineered the shut down and the threat of default.

The serious consequences of what default would have meant to the economy of the United States and to the world was one of the few conclusions that virtually all economists could agree on.

During the shutdown of the government, there were issues for folks trying to close on their loans and move into their new homes. Verification of employment was problematic for many banks which were doing what was once routine. Verifications of government workers buying new homes with a mortgage was a problem. Tax transcripts were unavailable during the shutdown. Some banks put a temporary waiver on this requirement. Rural loan products were stopped during the shutdown.

There were many home buyers who could not perform on their contractual dates due to the above circumstances. There are no provisions in contracts that deal with unexpected government shutdowns. How some of these played out will be interesting.

Perhaps Sen. Ted Cruz, R-Texas, who engineered the shutdown could explain to these innocent homebuyers what they were supposed to do.
Everyone hopes that there will not be a repeat performance by Congress in January. The ramifications on when someone can or cannot close on a home is far reaching for our economy, and this shows how “local” politics can be.

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