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Greece Bailout Crisis May Hit Home and Influence Mortgage Market

debtsGreek citizens delivered a surprising response to Europe’s leaders on Sunday, when a majority of voters rejected a deal offered by the country’s creditors. In this historic turn of events, the Interior Ministry reported that with more than 90 percent of the vote tallied, 61 percent of the voters said no to bailout terms offered by the country's international creditors, while 39 percent voted yes to these terms. The results of this vote leaves Greece’s financial crisis unresolved.

Mark Greene, contributing writer at Forbes gauged the connection that the Greece crisis can have on the U.S. mortgage industry finding that much of the issue rests with interest rates.

“As the natural order of all things financial presses for higher interest rates, the looming default crisis in Greece led investors to briefly seek safe haven in the credit markets last week, mainly Treasury and Mortgage Backed securities,” Greene wrote. “Whenever investor dollars run for cover to the credit markets, interest rates are pushed lower.  That’s how the credit markets supply and demand mechanics work, lots of demand pushes the price of limited supply higher and yields fall. For scoring purposes, lower yields mean lower rates.”

Interest rates are continuing to increase without any Federal Reserve interference or signs of significant economic recovery, Greene says. Fed rate hike conversation started in May 2013 and just this initial talk drove 30-year fixed mortgage rates a full percentage point higher in less than 30 days. Greece found themselves inching closer and closer to default as the deadline for their $1.7 billion payment to the International Monetary Fund (IMF) quickly approached, the Forbes writer said.

“As the deadline approached for Greece to make or miss, the mortgage universe waited anxiously for the inevitable flight-to-safety that investors would surely make,” Green said. “There was hope for a rising trend reprieve, however temporary it was going to be, interest rates would stop climbing and maybe move lower while investment dollars were safely parked in the credit markets.”

Dr. Rick Roque, managing director of retail at Michigan Mutual, told MReport that interest rates are at the focal point of this crisis in Greece in terms of how their vote will affect the U.S.

"The financial institutions have been pressing for higher interest rates, but the looming default crisis in Greece led investors to briefly seek safe haven in the credit markets last week, mainly Treasury and mortgage-backed securities,” Roque said. "The Federal Reserve has been clear: rates will rise regardless, and if a company's strategy is to hang on to weekly dips in rate, their refinance dependence is too high and the firm will be in trouble."

Roque also added that when Greece defaulted on its payment obligations with the IMF, mortgage interest rates decreased by one-quarter of 1 percent.

“On a $350,000 home, this would cost about $14,000 less over a 30 year period,” Roque said. “This, as we know, will be short-lived as European investors don't seem too nervous about a resolution.  Equity markets rallied and over the last 2-3 business days while we were enjoying the 4th of July celebrations, the interest rate benefits have evaporated.”

Sanjeev Dahiwadkar, CEO and president of IndiSoft, pointed out to MReport that there are varying viewpoints on how the “Greece Drama” is being looked at and although the U.S. impact may not be clear, it is still affecting the housing market.  

"For the U.S., its stability of Europe that matters a lot more than single country," Dahiwadkar said. "Short term, there may not be direct visible impact on the U.S. mortgage market, but effects are already being reflected in sliding stock markets. The indirect investment that U.S. has in EU is going to see the impact. After all, Greece is just the beginning. Spain and other countries are already in line. Unless the damage is contained within next 90 days, we all will start seeing its effect here in our home turf. As the investments are sliding, mortgage rates are inching upwards and life in general. The worst impact on the U.S. is going happen more quickly out of falling China market than Greece."

Ylan Q. Mui from the Washington Post pointed out three ways that the Greek debt crisis could affect Americans personally. The writer said that American 401(k)’s could get scary, European vacations could get cheaper, and mortgage rates could remain really low.

“If the European Central Bank has to provide even more stimulus to Europe to offset a Greek tragedy, and if that causes another spike in the dollar, and if that takes another bite out of exports, the Fed might be hesitant to raise rates at a time when the U.S. economy is stumbling,” Mui said. “And that would mean low mortgage rates would hang around for a little while longer.”

On the other hand, Business Insider writer Sam Ro argues that the crisis in Greece does not mean a lot to the U.S. economy, noting that economists agree that ‘Greece is not a big deal to the U.S.’

"The risks of contagion to the US economy and financial system are small," Julian Jessop, an economist at Capital Economics told Business Insider. "The direct links between the US and Greece (whose economy now accounts for a trivial 0.3 percent of global output) are obviously tiny. However, even exports to the EU as a whole only represented 1.5 percent of US GDP last year."

BNP Paribas' Paul Mortimer-Lee estimates that US exports to Greece account for about 0.006 percent of the US economy, and financial ties to Greece are also minimal, Business Insider reported.

"Bank for International Settlements Figures show that the exposures of US banks to Greece amounts to $12.7 billion, or just 0.04 percent of total cross border claims," Mortimer-Lee wrote in a research note.

Ro says that some people may argue that the turmoil in Greece could actually be a good thing for the U.S.

“Should things deteriorate across the eurozone, there may be more demand for safety in US Treasury securities, which could help keep the US financial market liquid and long-term interest rates low,” Ro wrote. “Ultimately, while the Greek story is a fascinating one, it just doesn't really move the needle in the US economy.”

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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