How Greece's problems create low mortgage rates

Posted by  on Oct 25, 2010

Mortgage quotes today: Greece is the word

How on earth does what's going on in Europe have anything to do with what your bank charges you for your mortgage? It's because today, American and foreign investors can buy into heavy machinery in India or sexy shoes in Italy as easily as they purchase IBM stock or Iowa corn futures. And investors look for the best vehicles for their money no matter what country produced them.

As the odds increase that Greece will default on its enormous national debt, all of Europe feels the effect. Greece is part of the European Union (EU), so its troubles affect the value of the euro. If you thought AIG was too big to fail, imagine the same scenario with a whole country. Greece makes up 2.6 percent of the eurozone economy, far larger than AIG's share of the US economy ever was. So while Greece's debt crisis prevails, Europe and its dominant euro currency become less desirable for investment.

Mortgage rates decline as demand mounts for Treasuries

And just like on Wall Street two years ago, the worries are contagious: anxiety has spread to debt-laden Portugal, Ireland, Italy and Spain, which together with Greece are now pejoratively called the PIIGS.

Investors have shifted into safe haven mode. "Safe haven" is financial geek-speak for risk aversion. This fear-driven trading pattern dominates during periods of economic uncertainty. It's characterized by large groups of investors moving money away from riskier investments and into safer ones - in this case, US treasuries and mortgage-backed securities (MBS).

The extra demand from local and foreign buyers pushed up the prices for safe haven investments. Bond and MBS prices move in opposition to mortgage rates, so when their prices increase, rates fall. And that's why, even with the Fed getting out of the MBS market in March, mortgage rates remained low in April.

Lowest mortgage rates: The party may be ending

However, it appears that Greece will be rescued by the EU after all. As a condition of its bailout, Greece will have to effect huge budget cuts and reform its finances. Salaries and pensions of government employees will be frozen for three years. Annual holiday bonuses will be limited or even scrapped for those with unusually high earnings. There will be a 10 percent hike in fuel, liquor, and tobacco taxes nationwide, and the national sales tax (value-added tax or VAT) will rise to 23 percent.

But while the Greeks are ponying up to pay down their national debt, you may be able to enjoy lower mortgage rates for years to come - if you act quickly and refinance or buy your home now.


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