As the federal government nears its Sept. 30 funding deadline, a shutdown seems increasingly likely. And since the government and general economy are essentially intertwined, a shutdown could impact borrowers seeking mortgages.
The good news first: Mortgage rates sometimes fall during government shutdowns, says Colin Robertson, founder of The Truth About Mortgage, a blog providing mortgage industry insights.
“Past government shutdowns have resulted in lower mortgage rates as investors seek the safety of bonds, with rates falling anywhere from (0.125 to 0.25 percentage points). So a 30-year fixed currently priced at 6.375% could drop to 6.25% or even 6.125%.”
However, it’s not a given that mortgage rates will fall — and importantly, a government shutdown could also cause mortgage processing delays and other disruptions to the housing sector.
[READ: Compare Current Mortgage Rates]
Why Mortgage Rates Could Fall During a Government Shutdown
Many Americans believe that the Federal Reserve sets mortgage rates, according to a U.S. News survey released today. However, that’s not true.
Mortgage lenders set the interest rates that they charge. Long-term mortgage rates are influenced by a number of economic factors, more closely tracking the yield on 10-year Treasury bonds than the federal funds rate. To put it simply, bond yields (and thus mortgage rates) tend to be higher when the economy is strong and lower when the economy shows signs of weakness.
Investors flock to the safety of bonds in times of economic uncertainty, which leads to lower bond yields. In fact, 2023 research from the financial services firm Morgan Stanley found that, on average, the 10-year Treasury yield has “fallen 0.59%” during shutdowns since 1976.
However, mortgage rates “do not consistently fall during a government shutdown,” says Realtor.com senior economist Anthony Smith. He points to two past shutdowns that led to different results for mortgage rates:
— The longest government shutdown lasted from Dec. 22, 2018, and went until Jan. 25, 2019 (35 days total), and 30-year mortgage rates declined from 4.62% to 4.45% during that time frame. Smith adds a caveat: “There was a pre-existing downtrend that began mid-November 2018.”
— Another shutdown that took place from Oct. 1 through 17, 2013 (16 days total) saw mortgage rates increase over that time, from 4.22% to 4.28%. After the shutdown concluded, however, mortgage rates reverted to a pre-existing downward trend.
“Overall, historical evidence suggests that shutdowns may create short-term noise in mortgage rates, but lasting movements tend to be driven by broader economic and policy forces,” Smith says.
[2025 Mortgage Rate Forecast: When Will Rates Go Down?]
One Wildcard: Friday’s Jobs Report
There’s another way in which the shutdown may cloud the short-term outlook for mortgage rates. If government agencies aren’t operational, they can’t release their scheduled data reports — like the September jobs report from the Bureau of Labor Statistics that would normally be released this Friday. In the mortgage industry, this report is considered the most important economic release of the month.
Mortgage pricing tends to react when economic data releases are either much stronger or weaker than what analysts expect. In the absence of the jobs report, the employment situation is unclear.
“Given the very weak data releases of late, mortgage rates could actually benefit more from another soft labor print than a government shutdown,” Robertson says.
Other Ways a Shutdown Could Disrupt Mortgage Borrowing
Mortgage rates aren’t the only thing to consider — in fact, they might be a relatively small concern for some homebuyers who could face more pressing challenges during a government shutdown.
While a shutdown isn’t expected to alter operations of the government-sponsored enterprises Fannie Mae and Freddie Mac, which are not funded by congressional appropriations, federal agencies may be affected, causing delays and disruptions across all mortgage types. Here are some ways that could take shape in the event of a government shutdown.
Some Government-Backed Housing Programs May Face Delays
Mortgage applicants seeking loans backed by a government agency may face hurdles. Here’s how different types of government-backed mortgages would be impacted during a shutdown, according to the National Association of Realtors:
— FHA Loans: The Federal Housing Administration will continue endorsing new single-family mortgages. But with reduced capacity, it will not continue servicing home equity conversion mortgages and Title 1 loans that are used to help homebuyers finance home improvements.
— USDA loans: The U.S. Department of Agriculture both directly issues and guarantees zero-down home loans for buyers in designated rural areas. Under a shutdown, the department would stop issuing USDA direct and USDA-guaranteed loans, and some USDA loan closings that are already in progress may be postponed.
— VA loans: The NAR says that while the Department of Veterans Affairs will continue its home loan operations during a government shutdown, a reduction in the VA workforce could cause slower approvals and appraisals, among other housekeeping requests.
[Read: Best Mortgage Lenders]
Closings That Require Flood Insurance May Be Delayed
The National Flood Insurance Program insures millions of properties as required for mortgaged homes and businesses in high-risk flood areas. The NFIP is administered by the Federal Emergency Management Agency, and it cannot issue or renew policies without funding.
Additionally, furloughs in the IRS and the Social Security Administration could result in processing delays, since lenders may need to verify incomes and identities with these government agencies during mortgage underwriting.
Federal Workers May Face Furloughs — or Worse
A prolonged shutdown could lead to weaker home sales in areas with a higher percentage of federal workers, according to Smith, including:
— Washington, D.C. (11%)
— Virginia Beach, Virginia (7%)
— Oklahoma City (4.2%)
— Baltimore (3.7%)
— San Diego (3.1%)
— San Antonio (3%)
This time around, a government shutdown could be even more consequential to federal workers as the Trump administration has threatened additional mass layoffs if a deal can’t be reached ahead of today’s deadline.
So while mortgage rates tend to fall in times of economic distress — and they may pull back slightly during a government shutdown — try explaining why that’s a good thing to a federal worker who’s just been laid off or a homebuyer who’s missing their closing date due to application delays.
More from U.S. News
Mortgage Rate Too Good to Be True? Read the Fine Print
2025 Mortgage Rate Forecast: When Will Rates Go Down?
Survey: Homebuyers Pin Refinance Hopes on Fed Rate Cuts
What a Government Shutdown Means for Mortgage Rates originally appeared on usnews.com
