Failure to boost debt ceiling could tank housing: CAP expert says

by CHRISTINE RICCIARDI

The federal government's Aug. 2 deadline to approve a new debt ceiling is rapidly approaching, and if regulators can't agree on something, the housing market could tank when key but "nonessential" government services are frozen, a financial markets expert said.

David Min, associate director for financial markets policy at the Center for American Progress, said in a commentary Tuesday that failure to increase the country's debt ceiling would cause regulators to freeze what they believe are "nonessential services." Min said many of these nonessential services include housing programs under the Federal Housing Administration, the Internal Revenue Service and the Social Security Administration.

"In the post-crisis world, private mortgage financing is but nonexistent, leaving the government to fill the vacuum," Min wrote. "Consequently, FHA today is a key source of mortgages, particularly for first-time homebuyers and other demographic groups who are critical for restoring some equilibrium to our still-ailing housing markets."

All year, Republicans pushed to cut federal spending by way of housing programs. In February, the House Financial Services Committee proposed cutting 12 different housing programs, including the Neighborhood Stabilization Program and the NeighborWorks America, from the federal budget.

In March, the House of Representatives voted 252-170 to terminate the Home Affordable Modification Program, or HAMP, two years early, based on underwhelming results.

In April, Republicans and Democrats compromised on a 2011 budget agreement that slashed $88 million in funding for nonprofit counseling groups approved by the Department of Housing and Urban Development.

Min calls these services critical in helping lower- to moderate-income families attain a home.

"Any extended suspension of FHA lending activities due to a freeze on nonessential government services would cause the housing markets to lock up and prices to potentially free fall, particularly at the lower end of the market where younger, lower-income, and first-time homebuyers are critical," Min said.

Freezing Social Security operations would inhibit lenders from verifying a borrower's identification, thereby slowing down the mortgage approval process even more, Min said. He added that freezing operations at the IRS would further freeze the housing market, as borrowers applying for a mortgage would be unable to receive any tax information to submit with the application.

URL to original article: http://www.housingwire.com/2011/06/21/failure-to-boost-debt-ceiling-could-tank-housing-cap-expert-says

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