On October 1, 2013, the United States Congress came to a stalemate and could not pass a budget bill, ultimately leading to the shutdown of the federal government. This shutdown caused many government institutions to cut unnecessary activities and furlough approximately 800,000 “non-essential” government employees. As a result of the shutdown, the housing market faced a few key issues: a delay in home sales, a possible backlog from the FHA, and risky transactions taken on by lenders.
Multiple government organizations were running on “skeleton staffs,” and were therefore not at full capacity to address the sale of homes. The U.S. Department of Agriculture, which is usually in charge of providing loans to rural and exurban home buyers, shut down entirely, rendering these loans unavailable. Additionally, the U.S. Bureau of Indian affairs must approve the sale of homes on Indian Tribal land; because many functions of the bureau were deemed unessential and many staff members were furloughed, these sales were delayed until the shutdown ended.
People feared that as the shutdown continued, the Federal Housing Authority, a part of the Department of Housing and Urban Development, would experience a backlog with loans that require more complicated approval. For example, with only 60 of its usual 3,000 employees, the agency had trouble approving loans needing flood insurance through FEMA, since these require individual verification. Even with the government up and running again, these backlogs may still cause delays in available loans.
During the shutdown, many lenders were frustrated that the Internal Revenue Service and the Social Security Administration were unable to provide adequate documentation on the income of borrowers, which is usually a crucial part of approving a loan. Lenders accepted tax returns from borrowers without the proper documentation, and planned to confirm these returns when the IRS was up and running again. Lenders were forced to put themselves at risk for bad loans if they received false information from borrowers.
Frank Nothaft, a chief economist and vice president of Freddie Mac, says in Freddie Mac’s October 2013 Economic and Housing Market Outlook, “We’re likely going to see the housing recovery slow down, but not shut down, as we close out the rest of this year due to tight inventories in many markets, rising mortgage rates, and slumping consumer confidence.” He predicts that the housing recovery should continue into 2014, but fourth quarter growth for this year will only be moderate as a result of the uncertain economic times during the shutdown.