Shutdown threatens to stall rural loans and flood insurance

By Samantha Delouya, CNN

(CNN) — Slower mortgage approvals, stalled rural home loans and a freeze on new flood insurance policies: The government shutdown, which began at midnight on October 1, could gum up some of the gears that keep the US housing market running.

It is unclear how long the shutdown will remain in effect. Experts say most housing programs will continue amid the closure, and most people may not be impacted yet. But with home sales already stalled by high prices, the government’s first shutdown in nearly seven years threatens to slow parts of the housing market even further.

“Anything that you need to reach the government for, if someone is not in the office or someone is on furlough, that loan may have an issue,” said Justin Demola, the president of Lenders One, a national alliance of mortgage bankers.

Flood insurance and rural home assistance programs on pause

At the height of hurricane season in the US, the National Flood Insurance Program isn’t able to write new policies during the shutdown, said Daniel Schwarcz, a professor of insurance law at the University of Minnesota. The program, backed by the Federal Emergency Management Agency (FEMA), offers federally backed flood insurance to homeowners.

“If you already have an insurance policy, it’s still in effect,” Schwarcz said. “The shutdown affects the ability of the NFIP to actually renew an insurance policy or issue a new policy, but it doesn’t undermine the validity or enforceability of an insurance policy that’s already been issued.”

That means homeowners whose policies are up for renewal may see their coverage lapse. They will have to renew those policies when the government reopens, but it could result in a coverage gap until then, Schwarcz said.

Demola said most mortgage lenders won’t allow a home purchase in a high-risk flood zone to proceed until a homebuyer obtains flood insurance. But all-cash buyers – even those in high-risk flood areas – aren’t required to get flood insurance and can proceed with their home purchases, even during the shutdown.

Some homebuyers may be able to obtain flood insurance on the private market, but people who are not covered by private insurers will have to wait for the government to reopen before they can finalize their home purchase.

In a statement on Wednesday, Democrats on the House Financial Services Committee warned that curtailing the NFIP “could threaten over 1,300 home sale closings each day, potentially locking thousands of families out of the dream of homeownership or putting them at risk if their home sales proceed without coverage.”

“The longer this (shutdown) continues, the longer it will affect the housing market,” Schwarcz said. “Once you start accumulating the days where these closings don’t happen or these houses remain on the market, that can start having effects… It can cause closings to fall through.”

Homebuyers in rural areas of the United States may be particularly affected. Housing loans issued by the US Department of Agriculture to help low- and moderate-income borrowers purchase homes in rural areas will not be issued during the shutdown, according to the agency’s contingency plans.

What will continue to run during a shutdown

Still, most people buying a home may not feel the effects of a shutdown unless it persists for an extended period, Demola said.

When taking out a mortgage, lenders will still be able to verify your Social Security number and income, he added.

However, with the Internal Revenue Service impacted, some mortgage approvals could face major delays, according to the National Association of Homebuilders.

Fannie Mae and Freddie Mac, the government-sponsored entities that help provide stability and affordability to America’s home mortgage market, will continue to operate, as they are technically independent companies run separately from the US government. That means most Americans who take out loans backed by the two entities can proceed with their home purchase – as long as their property doesn’t require a flood insurance policy.

The US Department of Housing and Urban Development, which administers federal funding for various housing services, said most of its activities supporting government-backed mortgages will continue during a lapse in funding, as well.

Nicole Upano, a representative from the National Apartment Association, said the agency is continuing to make payments for Section 8 contracts, which provide rental assistance to low-income families, the elderly and people with disabilities.

“There should not be any immediate disruption for any residents who benefit from Section 8 housing choice vouchers,” Upano said. However, the agency said it would not process new Section 8 waiver requests.

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