Shutdown stymies mortgage loans

When Evan Geiselhart heard about the possibility of a government shutdown, his first reaction was to “roll my eyes and say ‘Here we go again.’” As president of Illinois-based HomeTrust Mortgage Corporation, Geiselhart warily awaited the fallout, which didn’t take long.

“Just today we are having to tell someone we can’t close a loan until the government is back up,” he said.

The loan in question involved a mortgage insured by the Federal Housing Administration (FHA). FHA provided Home Trust some bad information, something usually corrected easily. But FHA’s shutdown plan “called for furloughing 96 percent of its workers,” according to CNNMoney. Evidently the remaining 4 percent do not include among their ranks those capable of correcting errors, leaving Home Trust’s client in a mortgage “no-man’s land” for the time being.

A still bigger problem for lenders and borrowers, however, is the shutdown of a department of the Internal Revenue Service which issues tax transcripts to lenders. According to Geiselhart, the company “can’t underwrite and therefore close a loan until we can get an IRS tax transcript to verify a borrower’s income.”

When asked whether the lending industry is likely to create options to work around the transcript problem, Robert Perry, executive director of the Illinois Association of Mortgage Professionals, was not optimistic: “Lenders are going to be hesitant to do anything outside of the box.”

Perry ascribed this reluctance to certain aspects of the Dodd-Frank Act, which vastly increased pressure on lenders to ensure consumers can afford a given loan. The legislation was an attempt to prevent the loose underwriting which caused the credit crisis in 2007. But the legislation has unintended consequences Perry summed up bluntly: “When you have regulators staring at you with a double-barrel shotgun,” and threatening to audit your office for months, “you have to decide whether or not that’s a business risk you want to take.”

According to Dan Frommeyer, president of the National Association of Mortgage Brokers, not many are willing to take that risk. He told CNNMoney, “All the banks I deal with have told us they would not be able to close” without the transcripts.

As the shutdown continues and lender losses from stalled loans start mounting, that risk assessment may shift. Rob Chrisman, publisher of a widely read industry commentary, reported internal announcements at several banks including Wells Fargo and U.S. Bank, which indicate that they may start relaxing transcript requirements.

Even so, there are other problems to navigate. Bankrate.com reported that the “U.S. Department of Agriculture … has mostly gone dark,” which means that most rural housing loans will be indefinitely suspended. Also, furloughs at the Social Security Administration could prevent lenders from verifying borrowers’ social security numbers, a routine precaution against fraud.

Of course, if the shutdown doesn’t last long, most experts agree the ultimate impact should be minor and short-lived. Geiselhart sees delays and hassles ahead regardless, and he just hopes that the shutdown “forces Congress to do some introspection regarding their lack of ability to compromise … but I’m probably being too optimistic.”