Entry-level homebuilders most at-risk as HUD shuts down
Prolonged shutdown may create delays for first-time buyers
A prolonged government shutdown may create delays for homebuilders and their FHA-qualified clients if the Federal Housing Administration remains closed for longer than a few weeks, an analyst with Sterne Agee claimed Tuesday.
The FHA will be handling loans going forward, but if the shutdown lingers on, it could strain the agency’s small, post-shutdown staff. This, in turn, could slow the FHA application process for builders and buyers alike.
The FHA admitted Monday that it revised its shutdown contingency plan and will continue endorsing single-family mortgages.
Yet, Jay McCanless, an analyst with Sterne Agee, believes a prolonged closing will have some impact on entry-level borrowers—and builders—if it lasts longer than a few days or weeks.
"If this shutdown lasts a month, then yes, I think there may be increased investor concerns," he said when asked about the impact on builders. "If it lasts a month, it could have a business impact on all of my builders, but it may be especially troublesome for the ones that I have identified as focused on the entry-level buyer."
The big lingering issue for all of these firms is the possibility of FHA processing delays.
The potential for delay comes in multiple forms, McCanless noted. For starters, if there is a question on a submitted mortgage application and the lender corrects it, the FHA may not be able to respond expediently to the correction if they are operating at lower staffing levels, McCanless told HousingWire.
"And if a new buyer comes into my neighborhood today, and they have a credit history where I can get them qualified for an FHA – but it would be a stretch to get them qualified for conforming – maybe I do the preliminary work, but I don’t go ahead and submit it."
Even though Ryland has some business risk from FHA-endorsed financing, about 70% of its homebuyer mix is classified as move-up buyers, making the firm less dependent on fast processing at the FHA.
But no builder escapes the potential impact if this drags on.
As McCanless points out, even luxury builder Toll Brothers (TOL) has some FHA business to satisfy homeowners in pricier metro areas.
The National Association of Home Builders is confident builders and home buyers have enough FHA support for now to keep business running.
"I think we were pretty happy to see they will be able to endorse (loans) short-term," said Michelle Hamecs, vice president of housing finance for NAHB.
She added, “They will be able to continue to endorse loans as long as their commitment authority is not expired.” On this point, Hamecs pointed out that HUD still has commitment authority leftover from 2013, which is good news from the operations front. However, she was unable to find out how much of that commitment was leftover.
Yet, even with loans still being endorsed, Hamecs admits some glitches could occur.
"However long it goes, there will probably be some delays going forward," she concluded.