If Congress does not act in time to increase the federal debt ceiling, the Federal Housing Administration (FHA) will likely shut down — cutting off a key source of mortgage credit for homebuyers.
Center for American Progress (CAP) associate director David Min expects the White House will deem FHA a "non-essential" agency and stop all loan approvals by the federal mortgage insurance agency.
"This would cause a devastating new shock to our extremely fragile housing markets," Min said in an article published by the Washington think tank.
Treasury secretary Timothy Geithner has warned that the U.S Treasury will have to cease all borrowing on Aug. 2 unless the debt ceiling is raised.
Many Republican lawmakers are skeptical of Geithner's deadline and his warnings of a financial catastrophe if Congress misses the Aug. 2 deadline.
The CAP associate director for financial markets policy noted that the government will have to slash 40% of its budget once the debt limit is reached.
"When you take out Social Security checks, Medicare checks and payments to our troops, there is going to be very little money left. Almost all administrative activities are going to be shut down," Min said in an interview.
It appears Fannie Mae and Freddie Mac may not be affected by the disruptions to the federal government. However, lenders seeking to verify Social Security numbers or check a borrower's tax return with the Internal Revenue Service will be out of luck.
"An extended federal debt ceiling impasse would shut down these critical activities, removing many potential homebuyers from the market and causing significant delays in mortgage approvals for everyone else," Min said.
Before joining CAP, he served on the staff of the Joint Economic Committee and worked at the Securities and Exchange Commission.