Shutdown Starting To Gum Up Mortgage Closings

8:13 p.m. EDT, October 11, 2013

A lot of things got in the way of Mary Brady’s refinancing her mortgage: being a busy single mom to two teenagers, working full time as a nurse, keeping up with home repairs.

But she never expected the federal government to be on that list.

“I was shocked when I was told that everything was on hold because of the government shutdown,” Brady said.

Brady’s refinance of her four-bedroom Colonial in Durham was supposed to close Wednesday. Her mortgage broker told her the transaction couldn’t go forward because the shutdown prevented authorities from verifying her Social Security number.

It isn’t clear how many borrowers in Connecticut are getting hit with processing delays tied to the shutdown, now in its second week. Some real estate agents and lenders say they haven’t yet experienced problems, but if the shutdown drags on, delays are likely.

An inability to verify Social Security numbers is one problem. Trouble obtaining income verification from the Internal Revenue Service is another. Both requirements were added for some mortgages as a result of regulatory reform in the aftermath of the recent mortgage and foreclosure crisis.

Brady stands to slice almost $500 from her monthly principal and interest payments. Her interest rate will drop from 6 percent on a 30-year, fixed mortgage to 3.3 percent on a mortgage with a fixed rate for five years and adjustable annually after that.

“It may not seem like a big thing, but in my little world, it is a big thing,” Brady said. “It’s affecting me, and I don’t even work for the government.”

Brady’s broker, Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford, said the lenders who purchase mortgages from him were uncomfortable not having verification of their Social Security number.

“I’ve been in the business 25 years, and I’ve never seen something like this where it is completely beyond my control and the lenders I sell to,” Menatian said. “The loans are good loans, the borrowers are good borrowers with good income.”

He added, “Everything is ready to go, and we can’t pull the trigger and close.”

Fannie Mae and Freddie Mac, two major purchasers of mortgages nationwide, have relaxed the rules that govern their purchases of mortgages that meet certain size requirements and are not backed by the Federal Housing Administration.

The mortgage giants said loans can still be closed without the IRS income verification, which can wait until the after the shutdown.

But some lenders may decide that it is too risky to close a large volume of loans without IRS income or Social Security verification. If they went ahead anyway and there were problems with income or borrower identity, it could leave them open to being responsible for any defaults and losses, said John Mechem, a spokesman for the Mortgage Bankers Association in Washington, D.C.

Approving loans without verifying income was a prime contributor to the recent mortgage crisis. Lenders were stung by heavy losses and scores of them across the country have failed as a result.

“The longer this goes on, the more skittish bankers may become,” Mechem said. “With each additional loan, they are taking on more risk.”

Brady said she had hoped to use some of the money she will save every month to pay for tuition for a master’s degree in nursing education. And, Brady said, she has put off some repairs around the house.

Brady said she worries that her rate might change. She was unable to lock in the 3.3 percent without the verification.

Right now, Menatian said, the shutdown is affecting a handful of loans he is dealing with. The impact could have been worse but rising mortgage rates this year have reduced refinancing applications.

Not everyone is running into trouble because of the shutdown, at least so far.

“Luckily no,” Paula Fahy Ostop, an agent at William Raveis Real Estate in West Hartford, said. “There was significant concern when the government shut down, but we haven’t seen any impact yet, even with FHA loans.”