The duration of the government shutdown will be a key variable in determining the impact, if any, for U.S. title insurance companies’ margins according to Fitch Ratings. The longer the shutdown lasts, the bigger the potential profitability impact to title insurers.
Fannie Mae and Freddie Mac operations have been largely unaffected. However, to the extent that these agencies rely on verifications and other functions from other government agencies (notably the Internal Revenue Service) Social Security Administration and the Department of Housing and Urban Development), title closings could be delayed or cancelled.
The Federal Housing Administration is affected by the slowdown but as long as the slowdown is brief, the impact on title insurers should not be significant, according to Fitch. As the shutdown duration increases, these government entities will not be adequately able to process demand for their services, thereby decreasing mortgage originations and title orders.
From a broader economic perspective, Goldman Sachs has estimated that the shutdown will reduce GDP growth by 0.2 percent in 4th quarter 2013 on an annualized basis if it lasts a week and 0.4 percent if it lasts two weeks. Goldman Sachs is predicting that 1st quarter 2014 will experience a bounce back of equal magnitude if the shutdown is resolved shortly.
It is more difficult to quantify how the shutdown will affect broader consumer economic sentiments about the housing market. However, Fitch believes that as long as the shutdown is brief, consumer confidence will likely not be materially affected. The housing market has improved over the past several quarters, but tepid economic recovery and continued uncertainty has slowed momentum. The largest variables influencing title orders are increasing interest rates, tighter lending standards, and low housing inventory in certain markets.
At this time, Fitch does not anticipate the government shutdown to affect ratings, as near-term pressure will come from a reduction in title orders that will pressure 4th quarter 2013 margins. The title insurance industry’s capital position remains adequate.