President Barack Obama's warning that a government shutdown might prevent many Americans from obtaining a mortgage may be more of a negotiating tactic than reality.
Obama and House of Representatives Speaker John Boehner on Thursday raced against a midnight Friday deadline to craft a budget deal that would cut billions of dollars in spending and keep the government open.
A shutdown is not without risks. But unless it drags on for many weeks -- an unlikely worst-case scenario -- home buyers would probably see little more than a brief delay in processing mortgages.
If the government does shut down, the Federal Housing Administration would close its doors. That means thousands of Americans looking to buy a house with an FHA-backed loan would not be able get a case number for their loan, and the lender would not be able to process certain paperwork for the government-backed insurance.
It may turn out that somebody who was trying to get a mortgage can't have their paperwork processed by the FHA and now the person who was going to sell the house, what they were counting on, they can't get it, Obama said on Wednesday.
What Obama did not tell his town-hall audience is that the banks making decisions about whether to grant the loan could continue to work with borrowers while the government is closed, dealing with the paperwork as soon as the government reopens, even retroactively.
The FHA's role supporting the mortgage market has ballooned as private credit tightened in the wake of the housing bust, making Obama's argument seem compelling.
The agency now insures about one-third of all new home purchase loans, compared with less than 4 percent before the housing market soured, according to the publication Inside Mortgage Finance.
That's more than 7,500 new FHA-backed mortgages issued every business day, according to Guy Cecala, the newsletter's publisher.
But the nation's biggest mortgage lenders, including Wells Fargo, Citigroup, JPMorgan Chase and Bank of America, have all been given authority to make FHA-backed loans without the FHA checking each loan.
The FHA guarantees loans that meet certain conditions but does not make loans directly.
Unless the shutdown lasted more than a couple of weeks, it should not delay FHA activity, said Cecala, Two weeks is not a huge ton of time in the mortgage business.
Still, the paperwork snafu could lower the April sales volume if some of those loans that would have closed in April end up closing in May.
While some number of deals could be scuppered, White House and HUD officials said the Obama administration did not have any estimates for how many.
Still, a temporary shutdown of FHA does come with risks.
Adam Levitin, a professor at Georgetown University who closely follows the housing sector, said the psychological effect of temporarily lower sales figures could further depress an already floundering market at the height of the selling season.
This is a really bad time to have a hiccup in the market, said Levitin.
The two largest providers of residential mortgage funds, Fannie Mae and Freddie Mac, would not be affected by a shutdown as they are technically private firms.
(Additional reporting by Alister Bull; Editing by Andrew Hay)