What the federal government shutdown means for the mortgage industry

The Senate has once again failed to break a grinding budget impasse, rejecting dueling Democratic and Republican measures to restore government funding. The collapse of both plans underscored the entrenched partisan divide and deepened fears that this shutdown — the first in nearly seven years — could stretch on for weeks.

In a pair of roll calls, Democrats blocked a Republican stopgap measure that would have extended current funding levels, while Republicans in turn voted down the Democrats’ counterproposal, which tied renewed government funding to the extension of enhanced Affordable Care Act subsidies. With neither chamber willing to budge, hundreds of thousands of federal employees remain furloughed or working without pay, and key services across the country are being curtailed.

The two failed votes marked the third time in as many weeks that lawmakers have tried and failed to reopen the government. Senate Majority Leader John Thune, Republican of South Dakota, reiterated his opposition to tying health policy to the budget process, while Democrats, led by Senator Chuck Schumer of New York, insisted that renewing the ACA subsidies was a nonnegotiable priority.

President Trump has threatened to use the shutdown to permanently reduce the size of the federal workforce and eliminate programs he opposes, a strategy that has unsettled unions, state governments and policy experts alike.

As the drama continues to unfold, mortgage professionals across the country are left wondering how this will affect their business and clients. We break down the key questions and what you need to know.

What agencies affecting the mortgage industry are most impacted?

Several federal agencies play a crucial role in the mortgage industry, and a shutdown can disrupt their operations to varying degrees. The most relevant agencies include:

• Consumer Financial Protection Bureau (CFPB): Oversees consumer protection in the financial sector, including mortgage lending.

• Department of Housing and Urban Development (HUD): Administers FHA loans and other housing programs.

• Federal Housing Administration (FHA): Part of HUD, insures mortgages for low- and moderate-income borrowers.

• Department of Veterans Affairs (VA): Guarantees loans for eligible veterans.

• Internal Revenue Service (IRS): Processes tax transcripts and verifications often required for mortgage applications.

• Bureau of Labor Statistics (BLS): Provides economic data, including jobs and inflation reports, which influence interest rates and market sentiment.

What could this mean for the CFPB?

The CFPB is somewhat insulated from government shutdowns because it is funded by the Federal Reserve, not through congressional appropriations. As a result, the CFPB typically continues its operations during a shutdown, including supervision, enforcement, and rulemaking activities. However, certain activities that require coordination with other federal agencies or the use of government facilities may experience delays.

Are mortgage brokers likely to see any significant impact to their day-to-day work?

For most mortgage brokers, the immediate impact may be limited, but there are important caveats:

• FHA and VA Loans: Processing and underwriting of new FHA and VA loans may slow down, especially if there is a reduction in available staff or if certain operations are suspended. This could lead to delays in approvals and closings.

• IRS tax transcripts: Many lenders require IRS tax transcripts (4506-T forms) to verify borrower income. If the IRS is operating at limited capacity, obtaining these transcripts could be delayed, potentially slowing down the loan process.

• Economic data releases: If the BLS is unable to release scheduled economic reports, such as inflation or jobs data, market volatility could increase, and lenders may have less information to guide rate decisions. One such BLS announcement is due this week, but now unlikely to arrive as scheduled.

• Rural housing loans: The USDA’s Rural Development loan program may see significant delays, as the agency typically ceases processing new loans during a shutdown.

How about mortgage borrowers? What holdups could they see?

Borrowers applying for government-backed loans (FHA, VA, USDA) may experience longer wait times for approvals and closings. Delays in obtaining IRS tax transcripts or Social Security number verifications could also slow down the process. Those seeking conventional loans backed by Fannie Mae and Freddie Mac are less likely to be affected, as these entities operate independently of federal appropriations. However, uncertainty in the broader market and potential delays in economic data releases could indirectly impact rates and loan availability.

How will the shutdown affect mortgage lenders?

Lenders may face operational challenges, particularly with government-backed loans. Delays in processing FHA, VA, or USDA loans can create backlogs and increase the risk of pipeline fallout. Lenders relying on timely IRS verifications or BLS economic data may also need to adjust their processes or risk models. Additionally, uncertainty in the financial markets due to missing economic data releases can make rate setting and hedging more challenging.

How long could these impacts last?

The duration of the shutdown will determine the extent of the disruption. Short shutdowns may cause only minor delays, while a prolonged shutdown could create significant backlogs and uncertainty in the mortgage market.

What if the president starts firing federal workers instead of furloughing them?

Last week, federal agencies were told to prepare layoff notices for programmes without funding by the deadline and for others not viewed as an administration priority. 

It remains unclear what those programs were, but if a scenario arose where the president attempted to fire federal workers instead of furloughing them, the consequences would be far more severe and long-lasting. Permanent loss of experienced staff at agencies like HUD, the IRS, and the VA would cripple their ability to process loans, conduct verifications, and provide essential services even after the shutdown ends.

The mortgage industry could face prolonged disruptions, with significant delays in government-backed loan programs, a backlog in tax and employment verifications, and a loss of institutional knowledge that would take years to rebuild. Such a move would also likely trigger legal challenges and create uncertainty across the financial and housing markets.

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