Government Shutdown Could Disrupt Flood Insurance and Other Key Services for Homebuyers

The federal government appears to be headed for a shutdown for the first time in nearly seven years, a development that could affect some homebuyers and the housing market.

Unless Republicans and Democrats in Congress can reach a deal by midnight on Wednesday, most federal operations will come to a halt until a new appropriations bill is passed to fund the government.

Perhaps the most significant impact for homebuyers would be a lapse in authorization for the National Flood Insurance Program (NFIP), which provides more than 90% of flood insurance policies sold across the country.

Without a new spending bill, the NFIP would be unable to write new insurance policies after Tuesday. However, existing policies would remain in force until their current term expires, and the program would continue to pay claims on those policies.

Mortgage lenders typically require flood insurance for homes that are located in areas at risk of flooding, and a pause in new NFIP policies could send homebuyers in those areas scrambling to find alternate sources of flood insurance, which tend to be costly and are not available everywhere.

The National Association of Realtors® estimates that a failure to reauthorize the NFIP would jeopardize at least 1,300 property transactions per day, adding ballast to a housing market that is already struggling under affordability challenges.

"If the federal government shuts down and Congress lets the NFIP lapse, home sales in flood-prone areas could stall almost immediately," says Realtor.com® senior economist Anthony Smith. "New purchases are at risk, potentially freezing deals and creating ripple effects for real estate agents, mortgage lenders, and title companies."

Private flood insurance is an option for buyers in some wealthier coastal cities, but is particularly hard to find in less populated areas and inland communities at risk of flash flooding, says Smith.

"An inland buyer that is required to have coverage may have only NFIP available, while someone in Miami or Houston might find multiple private insurers to choose from," he says.

USDA mortgage lending could halt

In the event of a government shutdown, the USDA Rural Development will halt operations, including most mortgage operations, according to guidance issued by the Mortgage Bankers Association.

The USDA's Single Family Housing Guaranteed Loan Program is designed to help low- and moderate-income households purchase homes in eligible rural areas.

Although home loans under the program represent a very small share of all mortgages in the U.S., USDA loans play an important role in some rural areas, and pausing the program could affect home sales in those communities.

On the other hand, VA loans guaranteed by the Department of Veterans Affairs are expected to continue processing without significant disruption under a shutdown.

While the VA loan program may experience delays, it should be able to continue operations in a shutdown by drawing available carryover balances from the previous year until those funds are exhausted, according to the MBA.

Little impact seen for Fannie, Freddie, traditional mortgages

Mortgage giants Fannie Mae and Freddie Mac would not be directly affected by a shutdown, except to the extent that they rely on functions of other affected agencies.

Although Fannie and Freddie are government-backed, they are not funded by Congress and instead are financed by the fees they generate from bundling mortgages into securities for sale to investors.

That means the demand Fannie and Freddie generate for conventional mortgages will remain in place, and a government shutdown shouldn't delay most homebuyers from getting approved with their mortgage lender.

In past shutdowns, furloughs at the IRS prevented homebuyers from getting the income verification documents they needed for mortgage approval, but that is not expected to be an issue this time.

That's because the IRS has reclassified its income verification service as a vital service that is authorized to continue despite a lapse in appropriations.

Altogether, a brief shutdown is unlikely to affect the housing market significantly outside of certain rural and flood-prone areas. But a protracted government closure could cause uncertainty.

"While the core of the conventional mortgage market is expected to function, a government shutdown will introduce significant friction and uncertainty into the U.S. housing market," says Smith. "A prolonged shutdown would amplify these issues, significantly impacting consumer confidence and risking a slowdown in the broader housing recovery."