Mortgages Listing

Europe’s Problems Affecting U.S. Mortgage Rates

In past years, a financial problem affecting one part of the world would not necessarily have any adverse affect on other areas but this is no longer the case.  Of course we know that countries buy goods from one another, meaning a tightening of belts in, say, America will adversely affect China for example.

The recent economic crises have now demonstrated another issue – the interconnectedness within the banking industry and the levels of debt held by large banks.  When that debt belongs to other countries which may not be able to pay it back (Greece), the web of banking institutions affected is spread wide.

Italian PM Resgins

So when we observe that U.S. mortgage rates have risen slightly following the news that Italian Prime Minister Silvio Berlusconi has announced his resignation (conditional on the passing of new austerity measures), it should really come as no surprise.  But maybe it should – what possible connection could a European PM standing down have with a change in the cost of American mortgages?

Silvio Berlusconi

In the long term there could be an effect; Italy has a big economy and the ripples from it’s financial problems could be felt in many other countries, but not for some time and the mortgage rates could well change again tomorrow.  In this case the answer seems to be a little simpler – a quiet day in the U.S. markets meant that they were susceptible to ‘interesting’ news from anywhere.  The bond markets suffered (Italy will be paying more to borrow money) and subsequently the mortgage markets reacted negatively, hence the rate rise.

Fannie Mae & Freddie Mac Asked To Write Down Balances

Negative equity is something homeowners from many of the major economies have had to come to terms with in recent years – many who were desperate to get on the housing ladder pre-2007 were approved large mortgages which stretched their ability to pay the monthly instalments.  When house prices began to fall in 2008, negative equity once again reared it’s ugly head as the value of the property fell below the value of the mortgage.

A shrinking jobs market and a struggling economy in the United States added to the problem, increasing the number struggling to service large mortgages.  One of the measures the Obama administration has been keen to implement is a write down of the balances where negative equity has occurred.

Taxpayers Money

Fannie Mae & Freddie Mac, the mortgage giants which were rescued with taxpayers money when facing disaster, are the principal targets of this proposal but have so far resisted the representations of various parties, including California Attorney General, Kamala Harris and Congressional Democrats .

Kamala Harris

The big two have some valid arguments why they do not want to do this; they don’t want to create a situation where it becomes attractive for borrowers to default, they argue that their own repayment modification plans are having a beneficial effect and lastly, they are both partially covered by mortgage insurance – meaning they would recoup some of the loss of a foreclosure.