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A Sept. 30 Government Shutdown Could Impact Real Estate

If Republicans and Democrats fail to reach agreement by Sept. 30, some services – such as NFIP, IRS and more – could slowly shut down, possibly delaying transactions.

WASHINGTON – Congress often agrees to continue government funding at the last minute, but a failure to extend the debt limit has, at times, forced the federal government to cut back on services. In general, vital services remain in operation, but a need for tax records could be delayed, and the National Flood Insurance Program (NFIP) could be impacted.

Past government shutdowns – 35 days in 2018-2019 and 16 days in 2013 – shuttered many federal agencies. In some cases, the government created work-arounds. In all cases, however, the problems grew worse as time passed.

Currently, debt funding must be passed before Sept. 30, 2021. At the moment, the extension is being used as leverage for passing or not passing other issues, and it appears as if it may happen again starting on Oct. 1. As a result of previous shutdowns, some federal agencies have a type of backup plan, though full services are unlikely if lawmakers can’t reach an agreement.

If the shutdown should occur, the following might be impacted, though the extent may not be clear right away:

Flood insurance: Buyers required to have flood coverage may find it challenging to secure National Flood Insurance Program (NFIP) policies, making it difficult to close on homes in flood zones. However, many Florida buyers have other options through private coverage, plus some flood policies can be assumed by the buyer if a seller is willing to do so.

Federal Housing Administration (FHA loans): FHA falls under the Department of Housing and Urban Development (HUD), and up to 95% of HUD employees have been furloughed in the past if the government shuts down.

However, FHA lending may not completely stop. HUD’s earlier Contingency Plan calls for FHA to continue endorsing new loans in its Single Family Mortgage Loan Program, but the agency will be short on staff during a shutdown. Existing and new FHA loan applications may take longer to approve and fund.

Rural Housing Programs: Rural housing programs under the U.S. Department of Agriculture (USDA), would likely stop issuing new rural housing Direct Loans or Guaranteed Loans, such as its Single Family Housing Guaranteed Loan Program.

Internal Revenue Service: Homebuyers often need tax-return transcripts if required by their lender. In a shutdown, however, the IRS generally closes and suspends processing forms.

While FHA and VA loans don’t require IRS tax transcripts, many lenders require them for various types of loans – sometimes including FHA and VA. If a government shutdown lasts for a while, buyers should expect delays. However, lenders have, in the past, become more flexible if buyers can’t secure Form 4506T through no fault of their own.

Government Sponsored Enterprises (Fannie Mae, Freddie Mac, etc.): During previous shutdowns, Fannie Mae and Freddie Mac continued normal operations, similar to their regulator, the Federal Housing Finance Agency, since they don’t rely on appropriated funds. They may also introduce relaxed procedures that permit closings to go forward without federal verification of Social Security numbers and IRS tax transcripts. However, lenders would still have to obtain federal verification of both before the GSEs agree to purchase the loans.

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