In an attempt to reduce the amount of time that loan approvals are disrupted by the federal government shutdown, government-backed mortgage giants Fannie Mae and Freddie Mac are temporarily easing some standards for lenders.
Fannie and Freddie provided instructions on Wednesday that outlined temporary steps for flood insurance verification and alternate processes for mortgage lenders to follow in the event that the shutdown interferes with their ability to obtain conventional employment or income verification.
In a letter to lenders, Freddie Mac senior vice president of single-family seller engagement Kevin Kauffman said, "We appreciate the understanding and consideration that Seller/Servicers extend to Borrowers coping with the hardships imposed by the shutdown."
Instead of issuing their own mortgages, Fannie and Freddie establish guidelines for "conforming" mortgages from commercial lenders, which they can then buy and securitize.
Because Fannie and Freddie are self-funded and do not depend on congressional appropriations to pay staff, their operations are unaffected by the government shutdown, despite the fact that they are essentially controlled by the U.S. Treasury.
The new rules for mortgage lenders take effect right now and will automatically expire when the federal government starts up again.
Temporary flood insurance regulations
While current policies remain in effect and the National Flood Insurance Program (NFIP) will continue to pay claims, the program cannot create new coverage until Congress approves a new budget package.
More than 90% of flood insurance policies sold nationwide are provided by NFIP, and mortgage lenders usually demand flood insurance for residences situated in high-risk flood zones.
Flood insurance is still required for at-risk properties, according to the new Freddie Mac guidance, but mortgage borrowers will be able to provide documentation proving they have applied for an NFIP policy, even if it hasn't been approved yet.
Lenders will need to confirm that the borrower actually purchased flood insurance that satisfies standard standards after the shutdown is finished.
Federal employees' waivers
According to the new guidance, lenders can forgo employment verification for government employees as long as they certify that the shutdown hindered them from obtaining verification and document the procedures they took to verify employment.
The temporary guidelines also exempt government employees from having to date their pay stubs no earlier than 30 days prior to the initial loan application.
If the lender has been able to get all necessary income evidence prior to loan delivery, federal employees on furlough are still eligible for mortgage approval.
Federal workers may be required to show proof of at least two months' worth of financial buffers to offset the possibility of income interruptions if the closure lasts past November 3.
Under existing normal procedures, mortgage lenders can also provide forbearance to help homeowners whose jobs are impacted by the closure.
IRS regulations for income verification have been loosened.
Staffing shortages during previous government shutdowns made it harder for certain mortgage lenders to get IRS income verifications.
Because of new automated processes at the IRS and regulation changes that exempt the income verification service during a hiatus in appropriations, that shouldn't be a problem this time.
Fannie Mae, however, states that as long as borrowers fill out and sign an IRS
The lender won't need to have a complete tax transcript prior to closing if they submit a Request for Transcript of Tax Return (Form 4506-C).
If the most recent year's tax return is unavailable, lenders must still get specific IRS papers, such as evidence of e-filing or an IRS answer attesting to the lack of a tax transcript.
Most conventional loan applications should go through without any issues, even if the IRS takes a while to process requests. This is because lenders will have 90 days after closing to obtain complete tax transcripts from the IRS.
