Mortgage Rates at This Year's Low, Thanks to Greek Chaos

Riots in Greece kill three bankers, and the threat of chaos pushes down interest rates for U.S. home loans.

The average interest rate for 30-year home loans dropped to 4.93 percent (with an average 0.7 percent origination fee) for the week ending May 13. That's close to the lowest-ever rate of 4.81 percent recorded last December, according to the Freddie Mac Primary Mortgage Market Survey.

So how does that work?
Apparently globalization still makes a difference.

For several days in the beginning of May, it seemed as if Greece might default on its sovereign debt. That could have led to defaults for Spain and Portugal, which also face serious budget problems, which could have led to ... who knows?

The stock market was nervous enough for the Dow Jones Industrial Average to drop 1,000 points for 15 minutes on May 6, only to roar back 700 points minutes later. It now seems possible that the 15-minute crash started with a trade large enough to spook a few institutional investors into selling. And that spurred a stampede of traders rushing to get out early if, for example, it turned out that a Euro-economic apocalypse had begun.

If that theory turns out to be true, it shows that even though the U.S. financial system is now supposedly in recovery, Wall Street was so frightened last week of another financial panic that a glitch or a rumor could trigger a massive 15-minute sell-off.

Why so nervous?

The return of randomness and uncertainty to our financial markets has pushed down home loan interest rates. In uncertain times, investors take their money out of risky, short-term investments like the stock market and park their cash in longterm investments like Treasury bonds instead.

Average mortgage rates tend to float a point or two higher than the yield on 10-year Treasury bonds. That's because bonds backed by home loans and guaranteed by Fannie Mae or Freddie Mac are only slightly riskier than Treasuries, so the yield demanded by investors for housing bonds -- and the interest rates banks charge to mortgage borrowers -- is only slightly higher than the yield on Treasury bonds.

Investors have been buying a ton of Treasury bonds since mid-April, when the Greek financial crisis began to make headlines. The yield on 10-year Treasuries has dropped from a high near 4 percent in mid April down to a low of 3.3 percent on May 7, just before the European Union announced its $900 billion bailout of Greece, Spain and Portugal.

Bond yields have been rising since the Euro-bailout, and hit 3.6 percent by May 13. Investors still seem cautious, however, as they size up each other and how frightened they all seemed to be a few days ago.

Provided there is no new catastrophe (a fine old Greek word), bond yields and interest rates will creep back up over the next few weeks, according to a panel of experts polled by
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