NEWS FLASH! Congress is arguing.

If the government does not pass stopgap spending measures by the end of this fiscal year on Saturday at midnight (9/30), beginning on Sunday, October 1, a government shutdown of "non-essential" services will begin. The United States has had 14 similar shutdowns since 1980 and the most recent was in 2018-2019, and it was the longest at 34 days. We have had 22 shutdowns in the last 50 years. At least we have survived these before, but there are some things us real estate warriors need to know:

1. FLOOD INSURANCE
   Regarding the National Flood Insurance Program, there are some SIGNIFICANT effects of a lapse in authority from Congress (aka "Government Shutdown") for NFIP issuance of flood policies, including renewals as detailed below (read source here):

"The NFIP may not issue new contracts for flood insurance during a lapse in authority unless Congress passes legislation reauthorizing the NFIP. If such a lapse in authority occurs, the NFIP will have limited ability to issue: 1) New policies, Including those obtaining mortgages from federally regulated lenders 2) Increase coverage on existing policies, including property owners refinancing existing mortgages 3) Renewal policies:  As long as your insurance company sent the renewal notice before lapse in authority and the insurance company received your payment before the end of the 30-day renewal grace period, the company may renew your policy. However, NFIP insurers may not issue new renewal notices during a lapse in authority.

Insurance companies may not issue new NFIP insurance policies for loans closing during a lapse of authority unless, the application was made prior to the lapse in authority AND premium payment is received within 10 days (if payment made by policyholder) or 30 days (if payment made through escrow, title company, etc.) of the closing date.

A lapse in authority will not affect the handling of a claim made against a NFIP flood insurance policy issued or renewed prior to a lapse. Your insurance company will adjust and pay your claim in accordance with the terms of your insurance policy."

I believe it is well known by now that new NFIP policies cannot be issued during a lapse in authority by Congress, however, in my research, I was surprised to learn that it affects renewal policies as well.   So unless the The National Association of REALTORS® (NAR)'s effort to secure a long-term reauthorization of the program are successful, this can be a big problem.  For instance, if a homeowner's FEMA flood policy renews about November 2023 and beyond, the renewal will not be allowed without Congressional authority. 

In an NAR article at this link, it states "Even if the federal requirement to purchase flood insurance is suspended, it would be up to lenders to decide whether to make loans in special flood hazard areas while NFIP insurance is not available." In my opinion, there is a FAT CHANCE they will make those loans unless there is adequate (and, of course more expensive) private flood insurance policies available that satisfy the lenders.
 

2. MORTGAGE RATES AND NEW MORTGAGES
   (Click here to view source.)

Although FHA, USDA, and VA loans will still be able to be issued in a government shutdown, there will be delays in processing because of limited staff within those entities. However, Fannie Mae and Freddie Mac are funded by fees from lenders, so their operations will not be affected, unless of course, the loan requires flood insurance (see above).  

A slight silver lining according to this article: "Ironically, a government shutdown could accomplish what the Federal Reserve has been trying to do for over a year: Cool off the economy. Chen Zhao, who leads the economics team at Redfin, noted that Treasury yields usually fall during a shutdown, which would lead to lower mortgage rates. But, it could also lead to a recession, resulting in job losses . . . And while a shutdown and potentially slower economy could, at least initially, cause interest rates to fall, no one should be expecting to see 5% mortgages . . . Case in point: A decade ago, rates dropped from 4.5% to 4% leading up to the shutdown, but were quickly back to 4.5% after it ended."
 

3. OTHER UNFORSEEN ISSUES FOR REAL ESTATE 
   (Click here to view source.) 

• Freddie Mac requires all buyers to have a Transcript of their Tax Return, and during previous government shutdowns, the IRS suspended the issuance of tax return transcripts.
• During past shutdowns, the IRS suspended tax refunds, and the release of liens and levies.
• The SBA will not process new loans or approve new routine small-business loans.

It is hard to escape the long arms of the Federal Government. A shutdown should not put us in panic mode, but we do need to know the short-term ramifications. No doubt real estate business will be interrupted, but hopefully it will be for just a short period. In the meantime, think before writing or reviewing offers. Ask yourself if the shutdown will affect the written terms or intentions of the buyer and seller? If it may affect the transaction, definitely consider some language that at least anticipates a potential problem, or has contingencies that would protect the parties to the contract.