Government shutdown

Government Shutdown – Impact On Mortgages

Every year, politicians in Washington claim there will be a government shutdown. Since 1980, there have been fifteen government shutdowns (as of 2024).1 A government shutdown can impact the mortgage industry in various ways, including mortgage rate volatility leading up to the shutdown and delaying the issuance of loan documents.

Understanding the dynamics of a government shutdown.

The dynamics of a government shutdown are complex, encompassing various facets that extend beyond political maneuvering. Triggered by a pause in money used to fund the government, federal agencies cease non-essential operations2 affecting critical areas of the economy, including mortgages and housing.

In this section, I’ll cover what instigates a government shutdown, its duration and frequency, and its impact on financial markets

What Triggers A Government Shutdown

A government shutdown is triggered when Congress fails to pass an appropriations bill.3 The impasse results from disagreements over budget allocations, policy provisions, or other legislative priorities. The absence of funding requires the Federal Government to use its cash on hand to fund essential services. Non-essential services are not funded, so operations are put on hold until funding can resume.

Frequency And Duration

The frequency of a government shutdown is sporadic when you evaluate their occurrence from 1980 – 2024. When you include 1970 – 1980, it seems more common since there were six government shutdowns in the 1970s.4

Government Shutdown Dates Since 1970

  • 1976: September 30 to October 11 (10 days)
  • 1977: September 30 to October 13 (12 days)
  • 1977: October 31 to November 9 (8 days)
  • 1977: November 30 to December 9 (8 days)
  • 1978: September 30 to October 18 (18 days)
  • 1979: September 30 to October 12 (11 days)
  • 1981: November 20 to November 23 (2 days)
  • 1982: September 30 to October 2 (1 day)
  • 1982: December 17 to December 21 (3 days)
  • 1983: November 10 to November 14 (3 days)
  • 1984: September 30 to October 3 (2 days)
  • 1984: October 3 to October 5 (1 day)
  • 1986: October 16 to October 18 (1 day)
  • 1987: December 18 to December 20 (1 day)
  • 1990: October 5 to 9 (3 days)
  • 1995: November 14 to 19 (5 days)
  • 1995-1996: December 16 to January 6 (21 days)
  • 2013: October 1 to October 17 (16 days)
  • 2018: February 9 (1 day)
  • 2018: January 20 to January 23 (3 days)
  • 2018-2019: December 22 to January 25 (34 days)

The 2018 – 2019 shutdown was the longest in duration, at 34 days. The fifteen government shutdowns that have occurred since 1980 have had an average duration of less than ten days.

Impact On Financial Markets

The impact on financial markets is one of increased volatility. However, that volatility has not had a negative impact. According to Forbes, since 1976, the S&P 500 has gained 0.3% on average during government shutdowns.5

According to the Forbes article, bond markets also tend to improve during this time. That’s because before the shutdown actually occurs, the bond market will sell off in anticipation of it (if selling occurs). So when the shutdown happens, the bond market is done selling since the market anticipated the event and the average duration of the shutdown lasts less than ten days.

For example, before the last shutdown, which started on December 22, 2018, the bond market sold off from August 2018 to November 2018. The 10-year treasury yield moved from 2.8% to 3.2%.6

During and shortly after the shutdown, the 10-yield moved lower.

According to Macrotrends.net, when we look at the 1995-1996 shutdown (which started in December 1995), the bond market rallied (yields moved lower) heading into the shutdown. In 1996 (post-government shutdown), the 10-year bond yield moved higher.

The impact on the mortgage industry

The impact of a government shutdown on the mortgage industry is multifaceted. Mortgage rates, loan programs, and the processing of loan applications are all affected.

Experienced loan officers know the implications and tend to try to close their loans prior to the occurrence, or they’ll advise their clients that there might be a delay in closing their loans.

Impact On Rates

Mortgage rates tend to move lower when there is an actual government shutdown. That’s because mortgage rates moved higher prior to the shutdown. They move higher to the occurrence of one because the bond market sells off before the shutdown happens.

Using the most recent shutdown as an example, the average 30-year fixed mortgage rate moved from 4.52% (August 30, 2018) to 4.81% (November 29, 2018).7 On December 27, 2018, five days into the government shutdown, the average 30-year fixed was 4.55%, which is twenty-six basis points lower than the high before the shutdown.

When we look at the 1995-1996 shutdown, mortgage rates moved lower heading into the shutdown (30-year fixed rates: 8.102% in August to 7.472% in December) and leveled out post-shutdown.8

How Long Does It Take Rates To Go Back To Previous Levels?

This is difficult to answer since so many things can impact rates after the government shutdown ends. All things being equal, the period in which mortgage rates move back to pre-runup levels will take longer than the actual move higher prior to the shutdown.

There’s a mortgage industry saying that goes like this; “mortgage rates take the elevator up and the stairs down.” This means that when mortgage rates move higher, they move much faster than when they move down.

Impact On Loan Programs

The impact on home loan programs during a government shutdown is significant. Specifically, government-backed mortgages.

FHA, VA, and USDA home loans are put on hold. Due to the uncertainty surrounding the shutdown, mortgage lenders may also slow down the process and closing of other non-government mortgage programs.

Impact On Mortgage Processing

When you apply for a mortgage, there is an IRS form that is included with the initial disclosure package you sign called the 4506-T. It’s included with the Loan Estimate, Equal Credit Opportunity Act form, Appraisal Disclosure form, and others.

The 4506-T is not a mortgage company document but comes from the IRS. Essentially it’s an authorization form that allows a company (or person) to verify your income.

More specifically, verify you filled a return (or returns) with the IRS and that the income you claimed on your loan application is accurate. Underwriters typically process the 4056-T form once they’ve issued an approval.

Processing A 4506-T

The IRS is in charge of processing the 4506-T form; typically, it takes 48-72 hours to receive the verification back from the IRS. At times, it can take 7-10 days to process, depending on how many requests they have to process and how busy they are.

During a shutdown, no 4506-T forms are processed by the IRS.

What If My 4506T Was Not Processed Before The Shutdown?

Are you concerned about closing because you just found out your mortgage company has not ordered the 4506-T?

Don’t panic just yet. If you have a high credit score, a low debt-to-income ratio, and plenty of equity, your mortgage company may not require the IRS to respond prior to closing.

While each file and loan is unique, it has been my experience that underwriting will try to determine if there are compensating factors so that they can move forward with an underwritten approval and closing. If it’s a purchase, there clearly is a greater sense of urgency than if it’s a refinance.

Impact on jobs and how that ties into mortgages

Federal workers and those who have private sector jobs tied to government contracts face a serious dilemma during a shutdown. That’s because they are temporarily laid off (furloughed) during a shutdown and receive no income.9

If you are a federal worker, or have a private sector job tied to a government contract, and are in the process of getting a mortgage loan approval, your application will be put on hold until the shutdown is over. There are two reasons for this;

  • You are not currently receiving income, and that impacts your mortgage application.
  • If you’re a federal worker, no one can verify your employment.

Planning ahead of a shutdown is vital to ensure your mortgage loan will close as anticipated.

The impact on real estate

Since the length of a shutdown is typically under ten days, there is generally no impact on real estate prices. Delays in closing will inevitably happen, but real estate prices remain stable and unaffected in most markets.

Bottom line on government shutdowns and their impact on mortgages.

Government shutdowns have had a noticeable impact on the mortgages. The trigger for a government shutdown is when politicians don’t approve a budget, and as a result, non-essential government operations are put on hold. Since 1980, the occurrence has been infrequent, and during the shutdown, the markets tend to respond favorably.

Before the shutdown, mortgage rates tend to move higher and then reverse during the actual shutdown. The biggest problem tends to be the processing of 4506-T forms and the delay in processing government-backed mortgages.

Sources:

  1. History.House.gov: Funding Gaps and Shutdowns in the Federal Government
  2. CRFPB.org: Government Shutdowns Q&A: Everything You Should Know
  3. Brookings.edu: What is a government shutdown?
  4. Thought.co: All 21 Government Shutdowns in U.S. History
  5. Forbes.com: How Might A Government Shutdown Affect Your Investments?
  6. Macrotrends.net: 10 Year Treasury Rate – 54 Year Historical Chart
  7. FreddiMac.com: Compilation of Weekly Survey Data for 2018
  8. HSH.com HSH’s National Monthly Mortgage Statistics: 1986 to 2016
  9. Shrm.org: What Happens to Pay, Benefits During a Government Shutdown?
Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447