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Government shutdown could halt mortgage market

(MoneyWatch) The government shutdown may force the housing market to a near-standstill, simply because of a clog in the paperwork.

Although initially it seemed the housing market would be largely unaffected by the government shutdown, lenders are hitting a roadblock that could cause major headaches in the mortgage market. The IRS is closed, and that means lenders cannot verify any tax information from applicants.

Whenever a borrower applies for a mortgage, he or she provides the lender with a slew of paperwork--bank statements, paycheck stubs, W2s and federal tax returns--that the lender must then verify. In order to do so, the lender requests a verification of employment and a 4506-T tax verification transcript from the IRS that details the borrower's tax return information, verifying what the borrower gave to the lender.

"Without access to tax transcripts and relevant information that must be verified by these agencies, it may not be possible to complete the loan verification process," said Don Frommeyer, president of the National Association of Mortgage Brokers, in a release. "Thus, the lenders working through the shutdown may come to a standstill while processing loans."

Some companies are, in fact, putting their lending on hold, while others are trying workarounds.

Dick Lepre, senior loan officer at California-based RPM Mortgage, said his company is funding loans without the transcripts, except for certain jumbo loans, Federal Housing Administration loans and Veterans Administration loans.

Private loans can close through a workaround, but will eventually need the transcript, so RPM will continue sending those requests, creating a backlog of requests the IRS will have to deal with when its employees are able to return.

New Jersey-based TD Bank has also figured out a way to proceed with mortgage applications, according to Mike Copley, the bank's head of retail lending.

The bank will try to verify income through other older systems and can continue closing loans through the FHA's guidelines, thanks to its status as a delegated underwriter -- a status not all lenders carry. However, while the FHA is supposed to be somewhat operational, Copley said that the bank was not able to get through to the federal agency.

For those borrowers that already have approval, it's possible they will be able to move through the closing process, even if the government shutdown goes on for weeks.

But it's also possible that closings will have to be canceled or rescheduled if a lender needs that information verified just before the deal takes place, so not only could mortgages and refinances be impacted, home sales could be as well. That impact could linger long after the shutdown is over.

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