Should Mortgage Rate Shoppers Care What Happens to Greece?

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People in the mortgage business know that rates are holding record lows here in the United States, but why?

As mortgage-backed securities (MBS) rally ever higher, rates drop, and the bid on the Fannie Mae 3.5% security has been …relentless. It’s at a staggering 104.13 as of now -- over a 4-point premium above par.  

But will it stay there?

If one looks at the most recent U.S. jobs and manufacturing data, it’s a picture of modest improvement. Normally, this would mean higher rates as investors shift out of safe bets into riskier assets, but the overhang of the Eurozone debt crisis proves to be too much. The bond market rally has continued relatively steadily, despite Greece trying to get private investors to agree on a debt deal, and positive or negative news moving our rates.

The proposed deal in Europe calls for Greek bond investors to exchange outstanding bonds for new ones with coupons as low as 3.6-3.75%, and take losses of about 70% in the process. If most private investors don’t agree, it could trigger credit default swaps (CDS) on these securities, leading to a European bank liquidity issue.

At this point, and bank liquidity issues in Europe have far-reaching impacts; that, plus the fact that the deal may not save Greece. This has caused investors to seek refuge in MBS and Treasuries yielding 1.84 right now (also staggeringly low). Our borrowers benefit -- up to a point.

Few want Greece to fail, because the ripple effect would be far reaching.