Govt. Shutdown Shuts Off Some Expensive Mortgages

The second week of the government shutdown is giving consumers and lenders second thoughts about the housing market. Lenders last week were giving assurances that they would use "work-arounds" for tax documentation on mortgage applications, but now the future is not quite as clear.

"As the government shutdown continues, we'll continue to evaluate the circumstances," said Tom Goyda, a spokesman for Wells Fargo, the nation's largest lender.

Goyda said Wells Fargo is following guidance from Fannie Mae and Freddie Mac, which does not require IRS verification unless the borrower is financing multiple properties. If that is the case, the lender can close the deal without the verification but cannot deliver it to Fannie or Freddie without the IRS documents.

(Read more: Big investors take pause in rental market)

Frederick Bass | Getty Images

Jumbo loans (mortgages with values exceeding $417,000) are getting trickier, however. Some lenders will not do them at all without tax verification from the IRS. Others are delaying the process. They will all have to verify the tax information once the government opens again, and that's a gamble. These loans are inherently riskier because most are held on bank balance sheets.

Wells Fargo is continuing to originate jumbo loans without tax document verification from the IRS. As for the risk it is taking on in doing so, Goyda said, "I can't really speculate on that."

"The industry is doing what it can to make the shutdown as seamless as possible, but some lenders are more conservative about it than others," said Matthew Graham of Mortgage News Daily.

Loans backed by government insurance from the Federal Housing Administration (FHA) and loans through the Department of Veterans Affairs (VA) are largely not affected, as their processes are mostly automated or lenders have delegated authority to close the loans.

"Bottom line here: Loans that are anywhere close to 'vanilla' are moving through the system more or less as normal," Graham said.

"Vanilla," however, does not include loans needing flood insurance through FEMA, loans for self-employed borrowers or loans requiring Social Security number verification, he said.

Mortgage Rates Slightly Higher, but Maintaining Recent Range

Mortgage rates moved higher today, but remain in the range of recently lower levels that has persisted since late September.  Conforming, 30yr fixed best-execution remains at 4.25% though the closing costs would be slightly higher today vs yesterday, or the lender credit slightly lower, depending on your scenario.

Prices of 'mortgage-backed securities' that dictate loan pricing (MBS) and other sectors of the bond market have been holding inside an uncommonly narrow range since the government shutdown began.  Bond markets are intensely interested in the economic data that's been postponed by the shutdown.  Until the data becomes available, it will take something significant to motivate bigger movement.

The first such "non-data" event arrives tomorrow, in the form of the Minutes from the most recent FOMC Meeting.  This isn't as important an event as the periodic FOMC Policy Announcements, but it may provide additional insight as to how the Fed will approach it's next meeting at the end of the month.  There has been some suggestion that Fiscal uncertainty will prevent the Fed from considering an adjustment. 

While this makes sense from a logical standpoint, it might make even less sense for the Fed to forgo tapering if the economic data justifies it.  It will be hard for the minutes from a meeting that finished on September 18th to speak to market conditions that didn't begin in earnest until October 1st, so there is a fair chance of an uneventful reaction.  In general, the less aggressive the Fed seems to be about decreasing their asset purchases, the better for rates.