Experts: Government shutdown increasing lenders’ risk exposure

Servicing

As the partial government shutdown drags on and 800,000 federal workers remain unpaid, experts at Moody’s Investors Service issued a note of caution to mortgage lenders of all types, warning of an increase in mortgage delivery risk.

The group explained that disruptions caused by the partial shutdown could potentially lead to modest strains on the balance sheets for nonbank lenders, as well as an increased risk of making bad loans for all lenders.

From the report (some parts bolded for emphasis):

The shutdown is negative for all residential mortgage lenders, which face an increased risk of missing red flags on borrower quality, lapses that could lead to loans with higher risk of losses. To replace origination processes that are out of commission or at reduced capacity during the shutdown, lenders will need to create more cumbersome or manual workarounds that may result in errors or, in the extreme case, instances of fraud.

The experts cautioned that lenders may need to develop workarounds to validate Social Security numbers rather than use the government. They also suggested that lenders request tax transcripts from borrowers instead of the Internal Revenue Service, stating that despite the IRS reopening and processing requests as of Jan. 7, there is a backlog and a delay in staff.

What do lenders do if the shutdown persists? The group writes: 

Additionally, in the event that the shutdown becomes prolonged, this and other government systems that are currently working, such as federal flood insurance, are at risk of shutting down. In such an event, lenders may need to obtain flood insurance from alternative private lenders, a switch that could result in higher costs or, in some cases, the lack of insurance. The shutdown is also negative for non-bank lenders, which currently make up approximately 60% of mortgage originations, because they will be unable to sell a small percentage of their loans (such as loans to federal workers because of the inability to verify their employment) during the shutdown to certain investors such as Fannie Mae and Freddie Mac.

Leave a Reply