Navigating the Government Shutdown: “Just Keep Going”

As the government shutdown stretches into its fourth week, Federal Housing Administration (FHA) lenders are working to keep deals moving amid an uncertain environment and a lengthening queue of loan applications within the FHA.

FHA lenders contacted by Tax Credit Advisor say they continue to submit loan applications into a queue that will be accessed by Department of Housing and Urban Development (HUD) staff once the government reopens. FHA lenders are working to keep business moving and deals alive, staying in close contact with clients to apprise them of HUD procedures during the shutdown.

Deals Queue Up as Backlogs Mount
To be clear, even though application processing has ground to a halt, it is still critical to send documents in to HUD on time.“If you submit an application while the government is shut down, Catalyst (HUD’s online application submission portal) will date your application as of the date it is received,” explains Holly Bray, senior managing director with Newmark’s Debt and Structured Finance Group. “That’s important for people with third party reports that could expire. If you get things into Catalyst, it will be time-stamped.”

HUD has not recently used a submission queue for multifamily loans. Now, “there will be a queue that HUD will need to work through once the government shutdown ends,” says Tracy Peters, senior managing director on Lument’s affordable housing  production team.

Even though loan applications can still be submitted into HUD’s system, they are not being processed, and lenders fear that the ensuing backlog may persist for many weeks once the government reopens.

“With HUD now, all of our deals and processes are frozen where they are and where they were when the government shut down,” explains Ibi Lumpkins, senior vice president and chief FHA underwriter for BWE. “That’s led to some frustration with both the lenders and the sponsors, which will only increase when the employees return and the lenders begin to call at the first available opportunity.”

 “We’re still lining up new business and setting our applications in line,” adds Lumpkins. “The backlog is going to be with FHA when they reopen and are trying to catch up. There’s going to be a two-or three-week backlog of deals.”

Bray says that she has been told by industry insiders that a good rule of thumb is that it takes a day and a half or two days for government to catch up for every day it was shut down.

“The longer it goes, the harder it’s going to be to get this engine going again,” Bray says.

Deals Staying Alive
All lenders contacted by TCA say deals are staying alive thus far during the shutdown and they know of none that have collapsed. Peters says the “good news” is that the FHA is still closing on loans where commitments, such as set closing dates, have been made. “That’s considered essential business,” he exlains, “so attorneys and closing coordinators are there to get these deals closed. We’re in the process of several of these deals now.”

Bray says she has not heard of any deals falling apart during the shutdown, although she can imagine how some deals might be threatened if a borrower were on a tight deadline. “If you had a borrower that was time sensitive, they might go find a different kind of financing,” she says.

Bray says that HUD regional directors are still working and all other staff in those offices are on an as-needed basis according to each offices’ priorities and regional directors’ discretion. “In the past, during other shutdowns, all the lawyers were considered essential employees,” she says. “This time the lawyers are only called in if the regional directors call them in.”

HUD is active far beyond loan processing, and other functions have persisted or halted depending on internal priorities. For example, Bray adds that she has recently learned that HUD has started mailing out access key codes for its Active Partners Performance System, the online portal where entities submit their 2530 owner entity documents.

“These deals typically have multiple entities, and all of those entities have to be submitted. The access key allows you to go in and make adjustments to your ownership entity,” explains Bray. “So, if people get their access codes, they can go in during the shutdown and do that.”

On the other hand, Bray notes that Transfers of Physical Assets, or TPAs, aren’t being given top priority during the shutdown. “One of the difficult things is that TPAs aren’t really considered a priority right now,” she says. “If you have a TPA or a transfer of a Housing Assistance Payment contract, it’s probably not going to get done before the government opens back up.”

Managing Expectations, Keeping Up Momentum
Lenders say clients’ expectations need to be managed in this liminal space of a shutdown. They advise keeping clients informed of HUD’s processes during shutdown as well as the likelihood of further delays once the government reopens.

“It’s about managing expectations,” says Peters. “Let clients know where things stand. As you get more intel from HUD and others, relay that and keep things moving forward.”

Peters says HUD has done a good job in recent years of shortening the timeframe on closing deals, “but obviously, it’s going to be a bit longer now from the time when you submit the application, to when you get the commitment out.” Still, he emphasizes that this lengthier timeline should not discourage ongoing business. “Don’t hold up on anything. We’re encouraging borrowers to just keep going. Get these applications in. The sooner you get it in, the sooner it will come out.”

Unfortunately, these occurrences have become “normal” in Washington, Lumpkins says. “When you get close to the fiscal year end, we know this is a possibility. We know that if you want to close a deal by year end, you have to have it submitted by June or July.”

Even when stuck in a shutdown, Lumpkins says there are helpful strategies that can help lessen the pains, encouraging partners to call staff in regional offices who may still be working and reachable by phone. “There are ways to navigate a shutdown. Leverage those relationships with the people in the production offices in each region. Have those conversations so you get the particular intel for those offices, so when things open, you know exactly what they need. If you rush in and bombard the production staff with calls and requests as soon as they reopen, that’s going to extend the shutdown a couple of weeks.”

Bray cautions that previous staff layoffs and departures at HUD also could play a role in slowing things down once the shutdown ends and employees start to process loans. “I’m a bit worried about all of the people who have left HUD. When we get going again, who is going to be there to work on this?”

Bray adds that the federal shutdown and its impact on HUD also carries implications for asset management. “There are properties out there that probably need to get approvals to release replacement reserve funds, or other more complex approvals from asset management, that are definitely not a priority right now,” she says. “It’s going to be an interesting problem when things reopen.”

Lumpkins reinforces that, for those who have been in this business for quite some time, a “temporary shutdown is not the end of the world.” However, “as it goes on longer, it becomes more impactful. We’re trying to get things lined up, but as that backlog gets larger, it’s going to take even longer to catch up.”