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April 8, 2011 - Credit unions and other financial institutions that make loans through the Federal Housing Administration will still be able to do so if the government shuts down, but those loans will not come with a federal guarantee to protect against default.

Housing and Urban Development Secretary Shaun Donovan confirmed the news Thursday in testimony at a Senate subcommittee hearing on the FHA and the future of the housing finance system. Speaking before the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, Donovan said he was "very concerned" that a government shutdown could force lenders to stop making loans backed by the FHA, which has been a key source of funding since the housing bubble burst, particularly for first-time buyers.

Donovan noted that the FHA backed roughly 20 percent of new loans in 2010, with about 40 percent of those being purchases. Outside of the FHA, most loans are backed by Fannie Mae and Freddie Mac, and Donovan said the two companies would not be affected by a shutdown since they remain legally separate from the federal government.

As NAFCU Today went to press, negotiations between President Obama and congressional leaders over the final details of a budget agreement were still ongoing. If an agreement isn't reached by midnight this evening, the government will shut down.

When the hearing turned to the future of the housing finance system, Donovan reiterated that the Obama administration sees the government-sponsored enterprises and the FHA having a smaller role. The new system would likely allow the current conforming loan limits to fall, he said. That may be painful for borrowers in some high-cost areas, but it will not jeopardize the economy, he argued.

When asked by Sen. Patty Murray, D-Wash., about risk retention and the potential for a 20 percent down payment requirement, Donovan said down payments matter, but other aspects like credit rating and debt-to-income ratio need to be examined as well. Murray also said she was concerned about GSE reform putting so many barriers in place that middle-class families can't afford homes.

Donovan also said the FHA is working to address the finding by HUD's inspector general that some loans did not meet FHA requirements. He also confirmed that the agency will be putting forward its nomination for the permanent director position in the coming weeks.