By Mike Colpitts
Driven by a spike in Treasury prices, mortgage rates saw a major drop lower as worries over a Greek default and the Federal Reserve’s dim 
economic outlook rattled financial markets. Rates paid to investors seeking the safest investment in Treasury bonds reached the lowest yield in four months Monday, hitting 1.84% on the 10-year Treasury note.
The spike in demand resulted in banks and mortgage companies lending to borrowers to set mortgage rates at their lowest levels in months. The rate on a fixed 30-year mortgage dropped to 3.50% offered at AmeriSave to online mortgage buyers on Housing Predictor.
The rate on the fixed 15-year mortgage, which is being purchased by more loan buyers these days was priced at 2.75% early Tuesday morning. Rates haven’t been this low in U.S. all –time history. Two weeks ago the benchmark 30-year fixed rate mortgage hit its all-time record low average of 3.88%, according to the Freddie Mac survey.
Greece is trying to work out a deal with banks and hedge funds that own its government bonds in efforts to wipe out its debt. Should talks fail with the Greece government, the country is likely to default setting off a round of government financial problems on the European continent.
Costs for many European nations loans rose as investors sold-off bonds, fearing contagion from a wave of defaults that is likely to send Greece into an economic depression.
In the U.S. mortgage rates are expected to remain low through at least 2012 as the Federal Reserve keeps the cost of borrowing for banks at or below 0. Existing home sales, however, remain sluggish, despite the lower rates as consumers remain less than confident about the economy.
However, the refinancing market could be bolstered by an Obama administration proposal that would allow millions of homeowners underwater on their mortgages to refinance at lower rates. The proposal needs Congressional approval to be implemented, but should Congress fail to approve the measure, the denial would inevitably result in an estimated additional 1.5-million foreclosures as more homeowners, unable to afford their mortgages walk away from their upside down homes.