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!


In a move that can only be described as “out of left field,” the Federal Reserve’s Open Markets Committee (or FOMC) released a post-meeting statement yesterday indicating that it would keep the target fed-funds rate around 0.00% – 0.25% through the end of 2014 in order to keep the economy growing.  This is an absolutely unprecedented statement, as it looks forward three years.  As you might expect, both U.S. Treasury and mortgage-backed securities (MBS) rallied hard, and we ended up closing up about 50bps on the day in the MBS market.  Prior to the announcement, the Fed had indicated that rates would remain low through the middle of 2013.


The Fed has indicated that there are “significant downside risks” to the U.S. economy in the months ahead, specifically in the areas of unemployment and (no surprise to any of you) housing.  Additionally, Europe remains the 800-pound gorilla in the room, with all eyes on Greece as it yet again tries to negotiate concessions from its creditors to avoid a “hard default.”  As I’ve been saying for almost a year now, it is a virtual certainty that Greece will experience some sort of default – whether soft (lenders voluntarily accepting a “haircut” in Greek debt) or hard (a refusal to make interest payments).  In fact, it looks now like that default may come as early as March.  If it is a hard default, that will trigger payments to investors under insurance contracts (known as “credit default swaps” or “CDS”).  Couple the payments that will have to be made on the CDS by the policy issuers (largely banks) with the losses incurred by institutional investors (also banks) not receiving interest payments on the defaulted debt, and we have a high likelihood of the entire European banking system being thrown into crisis and the world – including the United States – being thrown back into recession. 

Even if Greece manages to renegotiate its debt again this time, eventually the austerity measures may lead its citizens to vote out the current government and replace it with one that will default on the debt, take the country off the euro and end up back on the drachma (which carries with it a whole different set of pain points, but that’s beyond the scope of this post).  Should the world manage to weather the storm that is Greece, the specter of Spain’s problems (and Portugal’s and Italy’s too) looms on the horizon.  In other words, the headwinds are great and the Fed recognizes that.

Interestingly, much is being made of this morning’s positive economic news that durable goods orders jumped much higher than expected last month.  This is the latest in a string of reports that may lead some to conclude that we’re almost to the “happy days are here again” point.  Unfortunately, new home sales dropped again, making 2011 the worst year on record, AND the index of leading economic indicators (indicators of future economic activity), although improved, fell significantly short of expectations.  I still remain cautiously optimistic (economically) in the short term, but the leading economic indicators are a key piece of the puzzle to keep focused on in the upcoming months.  If today’s reading wasn’t just a “blip” and we see a downward trend, that will indicate that the U.S. economy is beginning to slow.


I’m sure that many of the originators reading this post are excited about the drop in rates that they saw on rate sheets over the past 36 hours – as well they should be!  However, I would strongly advocate that you use caution when advising borrowers regarding rate locks.  It’s only natural that borrowers hear the news about the Fed and think that mortgage rates are going to plunge; most borrowers don’t realize that the Fed does not control mortgage rates.  I am of the opinion that we won’t see much further of a decline in mortgage rates UNLESS Greece (or Spain) starts the default chain-reaction across the Atlantic. Then all bets are off. 

Although I do believe that default will come – at least to Greece – it is impossible to say when it will occur.  While floating shouldn’t hurt borrowers in the short term because there’s not really much that would lead to a spike in rates at the current time, don’t advise a borrower to float and postpone closing, waiting for that extra 1/4 of a point in rate.  It simply doesn’t make sense from my perspective; why sacrifice an unprecedented low rate and postpone real-dollar savings in the hope that you just might – maybe – see a 1/4 better over the next few weeks or months?  Remember the old Wall Street adage: “bulls make money, bears make money, pigs get slaughtered.”

Now, let’s go find a client and sell a home or a loan!