US Gov Shutdown Affects Real Estate?

On today’s show we are talking about the impact of recent US Federal Government policy changes and then the government shutdown on real estate.

There are several government agencies involved in commercial financing. These include the US Department of Agriculture, the department of housing and urban development, the department of Veterans Affairs, the Federal Housing Finance Agency (FHFA) and the Small Business Administration. 

Loan applications involving Fannie Mae and Freddie Mac also rely on reports generated by government agencies that are currently closed. All of these sources of financing are either delayed or are at a standstill. 

There have also been numerous policy changes that have affected loan approvals since the most recent federal election. 

How could this be a problem? 

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Episode Transcript

(00:01):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Monash. On today's show, we're talking
about the impact of recent U.S. Federal government policy
changes and the government shutdown on real estate.
Now several government agencies involved in commercial funding.
These include the US Department of Agriculture, Department of

(00:22):
Housing and Urban Development, Department of Veterans Affairs,
Federal Housing Finance Agency and the Small Business
Administration. Now, loan applications involving
Fannie Mae and Freddie Mac also rely on reports generated by
government agencies that are currently closed.
All of these sources of financing are either delayed or
at a standstill. They've been numerous policy

(00:43):
changes that have affected loan approval since the most recent
federal election. Could this be a problem?
Well, for example, if you have aUSDA loan with an energy
component in a USDA qualified region, that financing might
have disappeared altogether. You might have invested in an
energy project like solar or wind, only to have that
financing outright cancelled. the US Small Business

(01:05):
Administration also implemented numerous policy changes on March
the 7th of this year. This effects all loans.
I'm going to read to you directly from the text of the
policy notice. It says the purpose of this
notice is to revise standard Operating procedure #50-107
point one for 7A lenders and five O 4 certified development
companies. And it's to comply with Section

(01:25):
20 of 90 Fr 8443, protecting theAmerican people against
invasion. It's issued under the authority
of the Immigration and Nationality Act.
I'm not going to read all 6 pages to you in the interest of
time, but I'll highlight one of the relevant sections that goes
on to say SBA financing is limited to businesses with 100%
beneficial ownership by citizensof the US, US nationals or

(01:48):
lawful permanent residents, commonly known as green card
holders, and they comply with the requirements of this
paragraph. SBA lenders must certify that no
beneficial owner is an ineligible person.
Ineligible persons include, but are not limited to foreign
nationals, those granted asylum,refugees, visa holders, non
immigrant aliens, those under Deferred Action for Childhood

(02:10):
Arrivals, and undocumented aliens who are in the US
illegally. So what this means is that all
foreign investors are precluded from investing in projects that
have any form of SBA financing. Even if the project is say 99%
owned by U.S. citizens, that 1% foreign ownership would
disqualify the loan under the SBA program.

(02:31):
I get that SBA loans should not be going to people who are
illegally in the US, but this extremely broad definition goes
well beyond the targeting of illegal aliens.
It precludes foreign investment in US businesses.
Now let's talk about the government shutdown.
During a shutdown, the SBA haltsmost of its core lending and
investment operations. That includes new loan
processing for both the 7A and five O 4 loans.

(02:54):
And that's because the agency's non essential employees are
furloughed, leading to a standstill in underwriting and
approvals. If you have an existing
application, even if that loan'sbeen submitted, it's in
processing and might be in finalapproval, that too will be
delayed. Lenders with delegated authority
may be able to get the loan packages prepared, but they
can't get final approval or an SBA loan number during the
shutdown. If you've got loan dispersants,

(03:16):
let's say a construction draw for either new or existing
loans, those might be paused as often requires a final
authorization from the SBA. Now one of our affiliate
companies happens to have an approved SBA loan that was only
days from being funded when the shutdown took place.
So the start of the project is naturally being delayed because
nothing is going to be issued bySBA during the shutdown.

(03:36):
Now, thankfully, we were not already in construction.
Imagine for a moment if we were already receiving draw requests
from our general contractor for reimbursement of various phases
of construction. The loan disbursements would be
stalled because of the shutdown.There would be no mechanism for
the general contractor or for the subcontractors to get paid.
I could definitely have an impact on the project and

(03:56):
project costs. What happens to a borrower who's
not originating a new loan but is refinancing, and that new
loan might be maybe a HUD loan or an SBA loan.
In the case of a refinance, the existing lender might be at the
end of the term. That existing loan may not have
an extension clause that becomeseffective in the event of a
government shutdown. That could potentially put the

(04:18):
borrower into a technical default situation.
After the return from the shutdown, there is most likely
going to be a backlog of transactions that are going to
take some time to catch up. So the delay could be multiplied
beyond just the number of days of the shutdown.
We often don't consider that a government shutdown could impact
real estate, but I can tell you from first hand observation that
the impact can be very real. As you think about that, have an

(04:41):
awesome rest of your day. Go make some great things happen
and we'll talk to you again tomorrow.