Oct. 01--Economist Christopher Thornberg has likened the initial impact of the federal shutdown on the real estate and mortgage industry to a solar flare or a freak snowstorm that temporarily immobilizes activity on Capitol Hill.
If short-lived, the founder of Beacon Economics who was among the first in California to predict the Great Recession in the Inland region as the housing bubble burst, envisions no significant drop in the volume of FHA-insured mortgages and other government backed loans.
However, he said all bets are off if there's a protracted shutdown.
"Right now, this is business-delayed, not business cancelled," Thornberg said. "If the shutdown goes on for two, three weeks," he added, "I might change my view."
The real estate and banking industry on Monday released forecasts of the impact the federal shutdown would have on government-backed mortgage, construction and small business loan applications.
With most Federal Housing Administration workers being told to stay home, the FHA memo from the U.S. Department of Housing and Urban Development indicated that processing efforts could get hung up if the loan applications had just begun or had not cleared portions of government-backed loan reviews requiring oversight or documents from the Internal Revenue Service.
IRS documents are required to prove income or verify payments on tax or other federally imposed liens, for example.
"Right now, we're advising our members to proceed as normal," said Paul Herrera, government affairs director with Inland Valleys Association of Realtors. "As long as it's a short-term shutdown, it likely won't affect their transactions. However, as it draws into a second week or beyond, they may see problems with FHA loans getting through the process."
The snag would come in the underwriting portion of the mortgage application process.
"The IRS office won't be able to provide the forms to prove income, deal with tax lien information, and the like. Because those documents aren't available, those loans will be stuck until further notice,'' Herrera said.
It's in the intake -- the starting of the files -- where a backlog could occur, he said.
With the housing recovery in the Inland region still viewed as fragile, any slow-down in sales has a trickle-down effect on the economy.
National Association of Realtors chief economist Lawrence Yun recently pinned the August slow-down in pending home sales -- contract signings eased 1.6 percent -- on tight inventory conditions, higher interest rates, rising prices and restrictive mortgage credit.
For the three month quarter ended June 2013, nearly 20 percent of the 8,758 mortgage transactions reported to the Inland Valleys Association of Realtors were FHA-insured.
Conventional loans insured by Freddie Mac and Fannie Mae accounted for 34 percent of the transactions; Veterans Administration-backed mortgage applications represented 4 percent of the loan business, Herrera said.
Donavon Ternes, president and chief operating officer of Provident Savings Bank, agreed the FHA-furloughs could end up harming -- or bogging down -- the number of refinance transactions or purchase money transactions looking for FHA-insurance on the loan.
The Small Business Administration is also furloughing employees, he said, so there could be some impact with respect to SBA loan applications.
"But regulators are still regulating," Ternes said. "The Federal Reserve banking system remains in business, so banks and lenders are able to transact wire activity. We believe Freddie Mac and Fannie Mae are still in the business of purchasing loans. The remainder of our business seems to be okay."
Like Thornberg, Ternes agrees the clock on the nation's 18th federal shutdown since 1976 is ticking. "We're looking at anything less than a month as short-term," Ternes said. "As we get toward the end of the month, it'll be more troubling for us and the rest of the economy."
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Original headline: FEDERAL SHUTDOWN: Economist likens impact to mortgage, banking to 'solar flare'
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