A U.S. government furlough that last more than a few days will have an effect on mortgage origination, agency RMBS analysts said.

Market players are 100% sure the government will shut down, but the question remains over how long it will shut down for. 

Greg Reiter, managing director for agency residential security strategy at the Royal Bank of Scotland, said the shutdown would mostly affect Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) mortgages, which represent approximately 30% of monthly origination of mortgages.  

For smaller lenders, not knowing how long the government agencies will be closed means possibly having to hold onto any FHA or VA loans they've made for more than a few days.

These lenders may not have the capital to portfolio the loans for too long and they also run the risk of these loans not being approved, Reiter said.

"If the U.S. government closes, the FHA and VA will be closed, so fundings and closing of FHA/VA mortgages won't occur," Reiter said. "If this lasts long enough, we would see a likely slow in GNMA originations and April prepay speeds; of course, most loan closings would simply be pushed out a few days until the government re-opens, so even prepays would not be affected much for a very short closure. This is what happened in 1995." 

Reiter added that Fannie Mae and Freddie Mac would remain open and Ginnie Mae is also expected to operate normally in terms of MBS and CMO servicing.

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