The Shutdown’s Continued Impact on Lenders, Realtors and Borrowers

As the shutdown continues, there are ever-increasing implications to lenders, realtors, and borrowers. Here are the latest points of interest, as well as quotes from lenders on issues related to the shutdown.

By David Stevens – Mortgage Media

We published a quick review of what could be impacted during the shutdown on December 26, four short days into it. Today, amidst the longest government shutdown in history, we are sharing some of the latest impacts to update all of you. All the information below comes from senior executives of a variety of bank and non-bank lenders.

As cautioned in December, it is critical for Realtors and Borrowers to check with their respective lender as polices may differ. For lenders, it is important to check with your investors.  What is clear as the shutdown continues, there are ever-increasing implications to lenders, realtors, and borrowers. Here are the latest points of interest:

  1. The good news is that Flood Insurance, 4506-T Tax Transcripts, and Social Security Validations are currently not impacted. Please note that these are based on remaining funds available and should new appropriations be required it could impact these items.
  2. USDA loans are impacted. USDA offices are closed and therefore both conditional commitments and loan guaranty are not available.
  3. The HUD 184 program (Indian Home Loan Guaranty Program) is unavailable because the HUD offices are closed and cannot process case requests.
  4. VVOE (Verbal Verification of Employment) cannot be obtained for furloughed workers. While the GSEs are permitting the funding of these loans, they may remain ineligible for sale until VVOE can be obtained. I am getting mixed responses from lenders across the country as to how they are dealing with this. Some are not permitting closing of these mortgages until VVOE can be obtained while others are. I would expect this has a limited shelf life, as eventually the majority of lenders will be unable to warehouse these loans indefinitely waiting for government to open. Please check with your lender or investor, as their tolerance for risk here will vary.
    • Of note, Fannie Mae is permitting a loan to be sold without VVOE under certain conditions, see language below from Lender Letter LL-2019-02, dated January 16:
      • If the lender is unable to obtain the verbal VOE due to the shutdown, we will waive the verbal VOE requirement if the lender documents the loan file with a written statement describing:
        • the steps the lender took to obtain the verbal VOE, and
        • that the requirement could not be met as a direct result of the shutdown.
      • We are waiving the requirement that the paystub be dated no earlier than 30 days prior to the initial loan application date. Lenders must obtain the most current paystub that reflects year-to-date earnings and may need to obtain the final 2018 year-to-date paystub to accurately calculate income. All other paystub requirements remain unchanged.
        • The lender warrants that the borrower is employed at the time the loan is delivered to Fannie Mae.
        • The lender must obtain all other employment documentation as required by the Selling Guide.
  5. There are a variety of other concerns related to non-traditional programs at HUD. For example, FHA loan modifications are a challenge, especially if they need any type of exception as there is no one to grant these. This will be the case for any activity where a response from a HOC (home ownership center) is needed to complete a mortgage.

Beyond these items, the largest of which is the VVOE requirement and varied lender approaches to that, we are hearing many related issues from the shutdown. Here are some quotes from lenders:

  • “Hearing from real estate agents and builders that some purchasers are delaying buying decisions.”
  • “We have been absorbing lock extension fees and not passing them on to the buyers, not sure how much longer we can continue to do that.”
  • “Starting to hit our first significant batch of closings where we have furloughed buyers, unable to verify employment, some wanting us to push through closing and others saying they will not close.”
  • “Direction from investors on what will be acceptable to them has not been very clear.”
  • “Our stance has been, and continues to be, that the federal employees have to be back to work and getting paid before we can do a loan. FNMA/Freddie have come out with guidance that we can close a loan, but we can’t deliver it to them until the borrower is back to work. I suspect that lenders that do not have a bank-like balance sheets may or may not close these loans, and only hope that this thing ends quickly. So there are real folks not able to close on their loans, and in areas where inventory is tight, you might lose the home you had been planning to move into.”
  • “The longer this thing goes on the more impact it is going to have. We will see people who work in areas that support government workers having hours reduced, and or job loss which will obviously have an impact on our servicing portfolio and delinquencies. We are already seeing folks’ hours being cut back as a byproduct of the shutdown.”

The impact is not just to furloughed federal employees. It extends to contractors concerned their contract funds might dry up. Also left in limbo are business owners and other service providers who depend on the federal work force for their viability.

We will continue to provide additional information, should this extend much longer. It is difficult for many lenders to carry the weight of holding loans in warehouse that cannot be sold, as it exposes them to other risks and possible violation of warehouse covenants. Additionally we expect that the number of home closings delayed or cancelled from furloughed workers will grow marginally.

 

Dave Stevens

David H. Stevens, CMB, is Senior Advisor at Mortgage Media, and former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, and former CEO of the Mortgage Bankers Association