The USDA delays could cause a chain reaction in rural housing markets that reaches sellers, mortgage brokers, realtors, movers and builders.
Jacob Smith, a 25-year-old Florida firefighter, wasn’t paying much attention to the U.S. government shutdown until it threw his move to a new three-bedroom home near Daytona Beach into limbo.
Smith was ready to complete the purchase Oct. 1, the day the closure began. Now he has to wait until the Department of Agriculture reopens its mortgage business. For now, Smith’s landlord is allowing him to stay in his one-bedroom rental, crammed with boxes and furniture meant for the larger property. His builder, Adams Homes of Gulf Breeze, Florida, said it has about 10 other customers on the east coast of the state with purchases also on hold.
"It’s pretty ridiculous," Smith said. "It seems rare that what you see on the news is directly affecting you. Hopefully it will end soon."
USDA loans account for about 132,000 mortgages a year in areas designated by the agency as rural, according to the Mortgage Bankers Association. While they make up just 1.4 percent of the U.S. mortgage market, the product is one of the few available that allow zero-down payment loans and are an early warning of how the government’s first partial closing in 17 years could put a drag on the wider housing market.
"This is going to be devastating for people in the middle of getting USDA loans and for the communities that rely on the loans to support their housing markets," said Camden Fine, president and chief executive officer of the Independent Community Bankers of America. "Everything has ground to a halt until the agency opens for business again."
The shutdown resulted in hundreds of thousands of federal workers being furloughed, the closure of national parks and Internal Revenue Service call centers, suspension of clinical research trials at the National Institutes of Health and a halt to grants that fund Head Start, which offers educational programs and health care for 967,000 children whose parents live below the poverty line.
The budget stalemate centers on opposition by some House Republicans to President Obama’s healthcare law. Other consequences include lenders being blocked from verifying Social Security numbers and accessing Internal Revenue Service tax transcripts to confirm the validity of documents borrowers provide. The process also may lengthen the wait for borrowers seeking approval for mortgages backed by the Federal Housing Administration because its fulltime staff is now less than one- tenth of its normal size.
"The last thing we need is anything that shakes the confidence in a softly recovering housing market," David Stevens, chief executive officer of the Mortgage Bankers Association and former head of the FHA, said in a telephone interview last week.
Home prices, which have climbed 21 percent nationally since hitting a post-recession low in March 2012, are still 21 percent below their June 2006 peak, according to the S&P/Case-Shiller index of property values in 20 cities.
The damage to housing and financial firms will grow more severe the longer the shutdown lasts, Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC’s Washington Research Group, said in a research note today. What could have been "a minor speed bump if it only lasted for a few days is rapidly becoming an economic threat," he said.
An index of homebuilder shares has dropped 2.9 percent this month and is down 24 percent from a peak in May.
If the shutdown continues for more than two weeks, it will begin to "have an immense adverse impact," on the economies of rural communities, according to a USDA September report detailing contingency plans for a shutdown. Fifteen percent of the nation’s population, or 46.2 million people, live in rural counties that account for 72 percent of the U.S. land base, according to a May report from the USDA.
The USDA’s Rural Housing Services that administers the mortgages has its roots in the Great Depression in the 1930s, when it was established to aid farming communities including central areas devastated by drought that became known as the Dust Bowl. After the subprime mortgage collapse of the last decade, the program filled a void in lending products for first- time buyers.
The zero-down payment mortgages are for borrowers with incomes of as much as 115 percent of an area’s median pay. USDA borrowers pay an upfront fee equal to 2 percent of the borrowed amount and an annual insurance fee of 0.4 percent.
In addition to farm states such as Iowa and Ohio, the agency’s definition of eligible communities includes areas in western Massachusetts, New York’s Long Island, and other places that residents may not consider rural. The program extends to towns and cities with populations of up to 25,000 that the agency designates as "rural" if they are not suburbs and if their loans are used to purchase homes that are "modest in design, size and cost," according to the Office of the Comptroller of the Currency.
About 6 percent of mortgages last year were USDA loans in Louisiana, Wyoming and Arkansas, the states with the largest shares, according to the Mortgage Bankers Association.
The loans account for about 1 percent of the Florida market, according to the Mortgage Bankers Association. Their use is more concentrated in areas of central Florida, said Rob Nunziata, co-Chief Executive Officer of FBC Mortgage LLC in Orlando.
The USDA delays will cause a chain reaction in rural housing markets that reaches sellers, mortgage brokers, Realtors, movers and builders, Nunziata said.
Smith, who is buying the new house in Port Orange, Florida for $162,000, said his original purchase date at the end of September was delayed because the USDA was already backed up. Now the 4.1 percent rate he locked in 90 days ago has expired and it will cost him to lock it in for another 30 days. The rate offered by his bank is now about 3/8 of a percentage point higher.
"It has taken longer than it was supposed to already," Smith said. "Everything is in boxes and I’m ready to go."
His builder, Adams Homes, which also works in Alabama, Mississippi, Georgia, Tennessee, South Carolina and North Carolina, has cash tied up in these transactions that could be deployed in other projects, said Keith Clarkson, regional manager for the Florida east coast division of Adams Homes. The agency normally takes 15 to 20 days to provide letters of commitment, which are necessary for purchases to close, and the delays will likely be much longer when the agency begins issuing them again, he said.
"The whole company has a ton of USDA-eligible areas," Clarkson said. "We take out construction loans or sometimes we build out of our own cash. Either way, we’re going to have a home tied up and won’t be able to get this house turned over to the new buyer."
The immediate effect of the government shutdown won’t be felt beyond the disruption to home-sale transactions currently in the works, Seiberg said in a telephone interview. Longer term, the value of real estate in rural communities will decline without USDA mortgages, he said.
"Over time, you’re going to have a backlog of buyers and borrowers who are hoping to get the loans, and in those rural markets that’s going to matter," Seiberg said. "It’s going to put downward pressure on home prices in those rural areas and it’s going to bring the market to a standstill."
Many states with economies dominated by agriculture escaped the housing crash, registering small gains as prices were plunging in much of the rest of the country. Since the crash, prices in Iowa and Nebraska have gained about 5 percent, reaching records in the second quarter.
The USDA closed down its website and telephone calls to its headquarters in Washington and its mortgage servicing center in St. Louis, Missouri, aren’t being answered. For now, a skeleton staff is working to process mortgage payments, administer escrow accounts and preserve foreclosed properties.
"USDA is the be-all and end-all for some of these communities," said Fine, of the community bankers group. "People in most rural areas are culturally very comfortable dealing with the USDA, so it’s natural they would rely on it for mortgages."