Experts say the federal debt ceiling is in dire need of being increased, and if the increase does not happen soon, the Federal Housing Administration (FHA) could possibly shut down. If the shutdown occurs, a valuable source of mortgage credit for homebuyers will no longer be available.

“This would cause a devastating new shock to our extremely fragile housing markets,” said David Min, Associate Director at the Center for American Progress.

Many analysts expect the White House will deem FHA as a “non-essential” agency and stop all loan approvals by the federal mortgage insurance agency. If this goes into effect, Treasury Secretary Timothy Geithner has warned that the U.S. Treasury will have to cease all borrowing on August 2, 2011.

In addition, many Republican lawmakers have noted that the government will have to slash 40 percent of its budget once the debt limit is reached. This means that many administrative activities are going to be shut down.

However, the shutdown would not affect all lenders. Fannie Mae and Freddie Mac should be in the clear of the shutdown. Those unable to proceed with a loan are lenders seeking to verify Social Security numbers and borrowers’ tax returns with the Internal Revenue Service.  This shut down could benefit larger lenders who do not need to verify those pieces of information.

The last FHA shut down was in November 1995, in which case numbers could not be obtained and insurance certificates could not be issued. The government’s closing of the FHA delayed the process of more than 10,000 home loans. In 1995, FHA loans only had about 11 percent of the overall market. Currently, FHA loans account for about 20 percent of the overall mortgage market.

The president and Congressional leaders will need to strike an agreement in the next three weeks in order to win House and Senate approval before the Aug. 2 deadline.

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