How The Shutdown Will Hurt Virtually Anyone Who Lives In A Home

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"How The Shutdown Will Hurt Virtually Anyone Who Lives In A Home"

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The government shutdown and brinkmanship over the debt ceiling threatens the fledgling housing recovery by making it unnecessarily harder for borrowers to buy homes, homeowners to sell their homes, and low-income renters to stay in their homes. What may start out as a minor hiccup could ultimately have enormous social and economic costs if House Republicans continue to refuse to re-open the government.

First-time homebuyers, borrowers of color, and buyers in rural areas may be the first to feel the impact of the government shutdown. These homebuyers are more likely to rely on Federal Housing Administration (FHA) or Department of Agriculture (USDA) mortgage insurance to obtain a loan, since credit has tightened in the conventional mortgage market. During the shutdown, FHA’s single family lending is hobbling along understaffed and USDA mortgage lending has already shut down. There could be broader economic repercussions, business analysts warn, if homebuilders constructing homes for first-time homebuyers take a hit because of potential loan processing delays.

The shutdown will hit more borrowers harder if it persists. Generally, lenders must verify a borrower’s income and Social Security number with the Internal Revenue Service and Social Security Administration before a mortgage application can move forward. Although firms are scrambling to put contingency plans in place, homebuyers may still encounter glitches as they try to finalize loans or apply for a mortgage. If homebuyers can’t finalize their mortgages, they won’t be able to purchase properties.

And the consequences of the shutdown could be especially dire for renters. While funding is already approved to cover most rental subsidies in the medium-term, the Department of Housing and Urban Development may be hard-pressed to get the funds out the door to the public housing authorities who distribute the vouchers, as they are only operating with 4 percent of their staff. The two million households who rely on housing choice vouchers to stay in their homes may be in trouble if the shutdown lasts into November. Local public housing authorities, with budgets already ravaged by sequestration, could suspend issuing vouchers, or even revoke housing vouchers in some instances, to handle the new financing uncertainty created by the shutdown, according to the Center on Budget and Policy Priorities.

New apartment construction deals that need FHA financing are also on hold during the shutdown. The best case scenario: renters living in major cities will need to wait a little longer for that extra supply of housing that is supposed to bring rents down. The worst case: the deals fall apart irreparably.

Most worrisome is the uncertainty about the economy that would accompany any debt default. A default could put already skittish lenders and investors back on the sidelines, making it even more difficult and expensive for most Americans to get a mortgage. In the summer of 2011, the last time default was a possibility, mortgage rates went up by about 70 basis points, and these higher rates lasted into 2012, according to the Department of Treasury. That’s not to mention the financial chaos that could result from a downgrade of financial debt.

Sarah Edelman is a Policy Analyst in the Economic Policy department at the Center for American Progress Action Fund.

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