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» AGENCIES, ANALYSTS REACT TO GOVERNMENT SHUTDOWN As the federal government ground to a halt on October 1, the question of how the shutdown might affect the housing market was at the forefront of everyone's mind. How might the market react? The answer: It depends. Even with some 800,000 federal employees unable to work and the lights out in government offices across the country, mortgages continue to proceed through the usual government channels, although some delays are inevitable. More than 90 percent of the residential housing market depends on the government and/or the GSEs for underwriting, insurance, and funding. Mortgages controlled by Fannie Mae and Freddie Mac are not impacted by Congress' failure to pass a government funding bill because the GSEs are funded by fees from lenders rather than federal appropriations. The communications department at HUD shut down the morning of October 1, issuing the following statement: "Most HUD programs have been temporarily interrupted and most HUD employees have been told they cannot work. We will not be able to check this account or respond to questions during the shutdown." Of HUD's 8,709 employees, only 337 are excepted from a furlough during an appropriations hiatus. The Department of Veterans Affairs said it could continue its loan guarantee program through a government shutdown, although some processing delays are likely. The Department of Agriculture, however, is forced to cease all mortgage financing activity. Some concern was raised about how employment verifications for new loans would proceed with more than 85,000 Internal Revenue Service (IRS) employees furloughed. Freddie Mac issued the following clarification to lenders: "If a loan is made to a government employee and the closing date is during the shutdown period, you do not need to obtain employment verification or re-verification prior to closing if a government office providing the verification is not able to do so as a result of the temporary shutdown. You are also not required to obtain employment verification or re-verification for such loans after the shutdown ends. This exception does not apply to income verification or any other requirements. . . . We only require IRS Form 4506-T to be signed by the borrower prior to closing. We do not require that 4506-T be processed by IRS prior to closing. However, we require that the actual 4506-T information is obtained as part of the seller's in-house QC [quality control] program." Most economists agreed that the broader effects of the shutdown should be minimal, assuming the congressional gridlock is short-lived. "The most significant immediate-term impact of the government shutdown is whether it rattles households and businesses by impacting uncertainty and confidence," said Peter Muoio, chief economist with Auction.com Research. Speaking on the morning following the midnight deadline that slipped by, Muoio said, "With the shutdown only several hours old, it is too early to tell. So far the financial markets have not reacted wildly, which would get everyone's attention." Muoio continued, "All that said, the primary potential transmission mechanism is through uncertainty. So far this year, the decreased levels VISIT US ONLINE @ DSNEWS.COM of uncertainty have supported stronger economic growth and, therefore, demand for both residential and commercial real estate. We must gauge the shutdown's impact on uncertainty and stress that a quick solution would clearly have less impact than a prolonged fight." The economics group of Wells Fargo Securities issued a report to investors predicting the broad economic effects of a shutdown would be "minor." "Our expectation is that our fourth-quarter GDP call would be reduced by 0.0-0.5 percent. . . . There would be negative effects on government spending and reduced consumption from the furloughed workers," the Wells economists said. "Historically, following a government shutdown, the federal government boosts consumption and federal workers' payroll is restored. The primary reason for the minimal economic impact during this shutdown stems from the fact that most of the negative effects and the subsequent positive bounce-back effects are currently expected to be contained within the same quarter of growth." Research firm Capital Economics predicted the effect of a shutdown would be minimal provided it isn't presaging a fight over the debt ceiling increase. "Over a whole year, the cost would be equivalent to about 0.3 percent of GDP, which is manageable," Capital Economics said in its analysis. "If the current shutdown drags on, however, then once the debt ceiling limit begins to bite in the second half of this month, the economic and market impact would become much greater." On the possibility the debt ceiling isn't raised, Capital Economics said, "In all likelihood, the Treasury would not have enough cash on hand to make a scheduled Social Security payment of nearly $25 billion on November 1. It would also be unable to meet a debt interest payment of roughly $30 billion that will fall due on November 15, potentially triggering a technical default." STAT INSIGHT $2.2 Trillion Property value lost since 2007 by residents in close proximity to homes that have been foreclosed or are currently in foreclosure. Source: Center for Responsible Lending 49

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