The potential government shutdown that’s looming this week due to an impasse between political parties in budget negotiations has some new risks for housing.
In addition to more typical concerns, an Office of Management and Budget memo issued last week means the usual furloughs could be layoffs that compound the impact of previous public sector cuts. Also, some anticipate economic data delays that could impact rates and markets.
Housing has been a priority in Washington but whether that protects it, makes it more of a bargaining chip or is outweighed by other negotiation issues like healthcare subsidies remains to be seen.
“I can only really make educated assumptions based on the most recent information, but the key term for this looming, potential shutdown is uncertainty,” said Francis Torres, an associate director for the Bipartisan Policy Center housing and infrastructure projects, in an interview. “Certainly from our perch at BPC’s housing team, there are some trends that we can glean from prior shutdowns.”
Prior job cuts could intensify government loan holdups
U.S.-backed loan programs at the Federal Housing Administration, Department of Veterans Affairs and the Department of Agriculture typically face some delays during a shutdown and the new OMB directive and previous government layoffs may add to the strain.
“In the last shutdown, around 85% of HUD staff were furloughed. The number of staff has since gone down. So even if this share is similar, there might be fewer people actually in the building,” Torres said, noting this could impact lenders’ loan approvals or servicer claim inquiries.
If past precedent is any indication, these agencies will establish procedures for keeping things running with essential employees in place, but the OMB memo and other developments suggest some things could be different this time around.
Department of Housing and Urban Development officials have a plan utilized in the 2023 shutdown and they could potentially update this approach, according to a trade group representing them.
That plan no longer appears on the department’s website but is available in archived form, said David Dworkin, president and CEO of the National Housing Conference, in a report NHC published Sunday.
“The impact of a protracted shutdown on all Americans will be profound, and the impact on housing, in the midst of a major housing affordability crisis, will be severe,” he said.
“Agencies are already significantly understaffed following previous mass firings and the deferred resignation program, also known as the ‘fork in the road’ offer. Employees who accepted that offer will be officially separated from the federal government on Sept. 30,” Dworkin also wrote.
The timing is in line with the government’s fiscal year, which starts Oct. 1. A shutdown would start shortly after midnight that day if no consensus on the budget or stopgap funding that would kick the can down the road is reached.
Lenders with servicing units and mortgage investors have historically offered some leeway to furloughed borrowers likely to have temporary distress in some shutdowns but with layoffs potentially in the cards they may have to rethink the risk involved.
While the government-sponsored mortgage investors that the Trump administration is considering monetizing operate outside the federal budget process their loans could still be impacted by this.
Step for lenders: Be prepared to weather greater delays than usual in government loan processing or claims, and watch for possible changes in agency guidance this time around.
Economic data delays could affect markets, rates and more
“A U.S. government shutdown will likely delay key data releases,” Barclays researchers said in a report Monday, noting that in 2013, an employment report originally due Oct. 4 instead came out on Oct. 22. A Consumer Price Index report experienced a similar delay that year.
The next Bureau of Labor Statistics report is due Friday, and if a shutdown starts Oct. 1 it would most likely be delayed, according to Barclays. A CPI report due Oct. 15, other public information and data collection for October could be impacted if the shutdown goes on long enough.
The BLS also recently underwent a leadership change which could be a wild card in how it handles a shutdown.
Furloughs can have a mixed impact on jobs data depending on reporting methodologies but if the layoffs the OMB memo suggests are possible actually materialize it would be more broadly negative for jobs data, Barclays noted.
How the markets might respond to all this is tough to predict, Torres said. So mortgage companies may want to brace themselves for potential rate volatility.
“I don’t know that a shutdown would move rates in any particular direction,” he said. “One can make the case that you know worried investors might just move to expect slower growth. Maybe long-term treasury yields dip, which could nudge mortgage rates slightly lower. But if they worry about political risk or anything else, maybe yields can rise on a risk premium. It all really depends on how the dice land.”
Servicers could face an impact if the BLS data is not available related to seeing delays in the availability of information they use to size up portfolio risk, particularly in the FHA sector where borrowers are particularly vulnerable to job stress.
Turning to private sources of employment data such as the ADP payroll report may help address this concern, said Julienne Joseph, founder and principal of JYL Consulting and former chief of staff and deputy assistant secretary for single family housing at the FHA.
She also suggests watching refinancing application data and pull-through rates carefully, because a large number of inquiries around lower-rate mortgages that don’t necessarily result in closed loans due to difficulty meeting employment requirements can be a sign of distress.
“Job loss is probably the best indicator. I think also what needs to be watched is that there are going to be attempts at refinance applications,” she said. “Some of them are going to try it because they’ve heard the chatter of the interest rate drop, but there may be others who say, ‘let me try this before I go to a modification.'”
Step for lenders: Get ready for potential market and rate volatility with new patterns, and possibly operate without the availability of government data sources.
Widespread reform exacerbates inter-related program impacts
Some effects of a shutdown can be compounded for housing because some programs are interdependent, including the low-income tax program that will be getting a boost through new legislation that goes into effect next year.
“There are different federal programs, across agencies and also within agencies that are often involved in generating a particular outcome, especially when it pertains to housing policy,” Torres said. “A lot of LIHTC deals also have voucher funding or there’s a RAD program.“
“It will really depend on what the contingency plan is in the relevant agencies and the staffing levels that will be maintained to know how this will impact housing,” he said.
(The Rental Assistance Demonstration program and LIHTC partner in the provision of capital used to build or rehabilitate affordable housing.)
While the budget impasse appears to be particularly difficult this time around, Torres said he holds out some hope it could still be avoided because of the net concerns involved, which go beyond housing.
“Shutdowns are expensive. They generate costs for the American people. It’s not just an abstract budget fight, it’s potentially rent checks delayed to help stalled federal workers all over the country who are in a more precarious situation and so it’s a level of brinksmanship that shows that there’s better ways of doing things,” Torres said.
Step for lenders: Watch more carefully for interactions between housing agencies and departments, some of which could be under more strain than usual due to earlier cuts or operating under new rules.
