The fight may be in Washington, but the effects of the government shutdown will ripple through every neighborhood in America—without a fully functioning government, an already tight mortgage market may become even more prohibitive. It is exactly what the housing recovery does not need.
"This is going to be very disruptive to the mortgage industry and pretty much result in a freeze of the pipeline," said Craig Strent, CEO of Bethesda, Md.-based Apex Home Loans. "New loans can be taken, but without IRS and Social Security number verifications, [they] will not be able to proceed to closing."
After getting burned badly in the housing crash, most lenders now check everything on a borrower's loan application. It has become standard to verify tax returns as a quality control measure, according to Strent. If the IRS is closed, it will not process any forms, including tax return transcripts, so the loan applications will be stalled. For government workers themselves, it's even worse, because they will likely be unable to verify their employment on a mortgage application.
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At the Federal Housing Administration, which represents about 15 percent of the mortgage market, the lights will still be on, but the staff will be reduced.
"The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market," according to a post on HUD's website. Lenders with "delegated authority" will be able to go on making FHA loans. That is about 80 percent of FHA lenders. They will also be able to get FHA case numbers through the usual on-line service. The FHA will continue to collect insurance premiums from borrowers during a shutdown as well.
"The FHA program can weather a shutdown as long as it doesn't last too long," said Guy Cecala of Inside Mortgage Finance. "But a shutdown could also seriously impact FHA's ability to police lenders and loan quality."
The shutdown, if lengthy enough, could hit home mortgage refinances as well, delaying rate locks and resulting in costly extension fees.
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"What could happen is that our customers could be put in a hold status and then subject to interest rate gyrations that are very likely to occur between the time a government shuts down and reopens," said David Zugheri of Houston-based Envoy Mortgage.
Of course, mortgage rates could move lower if investors head to the relative safety of the bond market and drive yields down. Mortgage rates follow loosely the yield on the 10-year Treasury.
"Rates may go up this week if...Friday's job's report stays on the schedule," said Matthew Graham of Mortgage News Daily. "Markets would have to defend against the possibility of a strong report reigniting October taper expectations."
If the shutdown lasts for a few days or even a week, the immediate effects on mortgage availability will be minimal. It's the message this whole battle has already sent that is already doing much of the damage.
"It certainly won't help housing. Among other things, it is likely to spook would-be homebuyers," said Cecala.
Consumer confidence is a key component of the housing recovery, and while rising home prices have helped, more uncertainty in the economy can only hurt.
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"Some home-buying consumers are reluctant to buy because of the uncertainty," said Brad Hunter, chief economist at Metrostudy. "They see the factions in Congress as 'daring' each other, with extremely high stakes. People are not especially comfortable making the biggest investment of their life when the government seems to be unable to solve important problems."
—By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick. CNBC's Stephanie Dhue contributed to this report