How does a U.S. government shutdown affect closings and the title industry as a whole? What can a title company do to prepare for a looming shutdown?
These questions were among a few posed by The Title Report to Knight Barry Title CEO and President Craig Haskins, who said the principle of “real estate being local” rings true in this scenario.
“The majority of the public records needed to issue title insurance policies are very local and sit in the county and state offices,” he said. “Sometime –but rarely – we need to pay federal tax liens, and getting payoffs and making payments of those liens could get weird if there isn’t anybody in those agencies to deal with. But title agents and quick-thinking underwriters are good at working through these situations, so it’s hard for me to think of a scenario that would cause a consumer not to be able complete a closing on their home.”
The most recent government shutdown occurred from December 2018 to January 2019, a 35-day stretch that set a new record for shutdown duration. It was also just the third time in U.S. history that a shutdown stretched for longer than five days, with all three extended shutdowns occurring since 1995.
According to the American Land Title Association (ALTA), closings were disrupted or cancelled during the 2018-2019 shutdown due to inability to obtain lien payoff information from the Internal Revenue Service (IRS).
“I was initially concerned about the Federal Reserve and its ability to keep wire transactions flowing,” said Haskins. “But I understand that this section of the government is funded differently and there shouldn’t be a delay with wires – we hope. But as a safeguard, I sure am happy that our company has been using real-time payments just in case things change at the Fed. It would be very difficult to make payoffs and give sellers their proceeds if the wire systems were hampered.”
A shutdown contingency plan from the U.S. Department of Housing and Urban Development (HUD) states the Federal Housing Administration (FHA) will continue to endorse new loans in its Single-Family Mortgage Loan Program, except for home equity conversion mortgages, during any shutdown.
ALTA said a limited number of FHA staff will be available to endorse new loans during any prospective shutdown. Due to limited staff, FHA expects the time to endorse cases to be extended and will reportedly not make new commitments in the Multi-family Program during the shutdown.
FHA stated HUD will only close on projects with firm commitments that have a scheduled closing date or projects with critical external deadlines during a shutdown period.
As with previous shutdowns, the U.S. Department of Agriculture (USDA) will not issue new rural housing direct loans or guaranteed loans. Scheduled closings of direct loans will not occur.
“With a shutdown, those loans don’t take place,” U.S. Department of Agriculture Secretary Tom Vilsack told ALTA. “It’s conceivable in those circumstances that not only are they not able to close the loan, it’s also conceivable that they may lose the deal.”
In the past, the USDA said scheduled closings of guaranteed loans without the guarantee previously issued will be closed at the lender’s own risk. Neither Fannie Mae nor Freddie Mac have issued formal guidance on how a shutdown impacts their operations.
During the 2018-2019 shutdown, Fannie Mae and Freddie Mac updated or clarified their loan purchase requirements. Freddie Mac required all borrowers to sign a 4506T request form prior to close, but the request did not have to be processed prior to close. Fannie Mae required the same unless the borrower’s income could be verified though Fannie Mae’s proprietary desktop underwriter verification system in which case no 4506T was required, ALTA said.
The National Flood Insurance Program is managed by the federal government. During a shutdown, there can be delays or disruptions in the issuance of new policies, which can impact home sales in flood-prone areas.
“This is similar to the last shut down and I can’t recall any transaction dying on the vine back then,” Haskins said. “The U.S. economy seems to run on real estate so I can’t imagine the government allowing this shut down to kill off such an important sector of the economy – however something tells me I may have to eat those words someday.”
Haskins was asked what the public and private sector can do better to prepare for federal shutdowns.
“What holds back better preparation? Hands down, title agents should master real-time payments to be ready for any complications at the Federal Reserve,” he said. “Additionally, they should be sure they are dealing with an underwriter who is ready to put the old school title manual down and be creative to keep transactions flowing. Telling a consumer they can’t close on their home is not the answer title agents want to give, so working with an underwriter who can be creative when times are different goes a long way.”