Will the European Implosion Impact U.S. Mortgages?

I’m not generally one to say “I told you so” from an economic perspective (because there are plenty of things I get wrong), but for those of you who took my mortgage CE course last year and remember the fantastic discussions we had on Europe…


  • Today, it’s widely expected that Greece will send a letter to the EU essentially reneging on the austerity measures they agreed to in order to get their last two rounds of bailout money.  Even mainstream economists are beginning to predict a greater than 75 percent chance that Greece will abandon the euro in the next year or so after a true hard default on its sovereign debt.  (I wonder if the letter will begin “Dear John.”)
  • In case you missed it, French voters booted President Nicolas Sarkozy over the weekend and elected the Socialist candidate, François Hollande.  Although the vote was much closer than expected even a week ago, the result indicates a possible (likely?) lurch to the left in French economic policies, which doesn’t bode well for budget balancing measures that, in all honesty, are needed to keep France on a sustainable economic path.  Remember, French credit ratings were cut across the board earlier this year, and S&P is already indicating it could happen again soon.  To add insult to injury, the major agencies are slashing credit ratings on European banks (many of them French) faster than Zorro does one of his cool trademark “Z”s.
  • Speaking of Zorro, Spain’s unemployment rate topped 21 percent in the first quarter of 2012, and the rate for people under 25 years of age is over 50 percent.  The austerity plan enacted in Spain by Prime Minister Mariano Rajoy only passed by one vote in the Spanish parliament in 2010.  With Greece likely telling the EU to take a hike, how much longer can Spain hold the line, especially in a hot Spanish summer with unemployment rates that frequently lead to civil unrest?
  • For the euro area as a whole, unemployment was 10.9 percent and has been steadily trending higher for an extended period.  A number of euro countries are already in recession, and it doesn’t look good for the continent as a whole going forward.  Even the German economic numbers, long the bedrock of Europe, are now showing signs of weakness.


As the least contagious guy in the leper colony, U.S. Treasuries (and mortgage bonds) should see continued favor among investors, at least until the big picture in Europe becomes a little clearer.  Global equity markets are (quite rightfully) getting jumpy about the economic situation on that continent.  Beyond that, however, there are concerns here at home, with recent economic reports indicating a weakening economy.  Although there is still positive job creation, the April unemployment report showed only 115,000 jobs created, well below the 150,000 – 165,000 needed to keep up with people entering the workforce.  There was some strength shown in upward revisions of February and March numbers, but expect the markets to be focused like a laser beam on anything jobs-related over the next few months.  Adding to the headwind in equities, it appears that China may also be heading for a recession

At the end of the day, all of this uncertainty should keep U.S. mortgage rates low in the short to medium term.  Remember, though, that we have our own set of issues to deal with to get back on a sustainable path.  Use this opportunity to refinance anyone that you can, but don’t take your eyes off the prize.  Remember, rates WILL increase.  When they do, the refi market will evaporate faster than a thimble of water in a Mojave Desert summer.  Don’t lose contact with your real estate referral sources.  Now is the time to stay in touch with old partners and cultivate new ones, as your competition is probably focusing exclusively on refinances.

Happy originating!

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