Now that the Fed has begun buying Treasuries with proceeds from maturing CMBS, one regional Fed chief thinks a series of smaller policy actions that appropriately weigh economic risks can become one single larger action.

Speaking at a conference in Arkansas Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, said the American economic outlook has been lowered but remains positive and any policy changes undertaken by the FOMC toward quantitative easing"should be disciplined and focused."

"Large, sudden purchases rarely are optimal. 'Shock and awe' is almost never a good way to proceed," Bullard said. "Policy actions should be commensurate with the risks that the economy faces."

Bullard said core inflation is low but manageable and he wants to keep it from failing to levels observed in Japan in the '90s. Still, the Fed may have to purchase more Treasuries than necessary to maintain its balance sheet at $2.05trn should the disinflation risk increase.

Write to Jason Philyaw.

Government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae may exercise the right to force the big four banks, JP Morgan (JPM: 37.21 -0.75%), Citigroup (C: 30.87 +1.61%), Bank of America (BAC: 7.29 -0.14%), and Wells Fargo (WF: 29.65 +4.59%), to repurchase up to $180bn delinquent mortgages, according to a report released by Fitch Ratings Wednesday.

As of June 30, the GSEs hold $354.5bn troubled mortgages, with 50% serviced by the big four banks. Fitch estimates the big four banks already received repurchase requests up to $19.1bn in the Q110 and Q210 — $10.7bn of which related to the GSEs.

Fannie and Freddie are "actively exercising their right to put back to the original lenders a considerable amount of the troubled mortgages in their portfolios," write analysts Tom Abruzzo and Christopher Wolfe. The agencies have a right to require lenders to buyback delinquent mortgages, if it is determined the mortgage loan did not meet GSE investor underwriting or eligibility standards.

Fitch said it is undertaking a review of Fannie and Freddie to assess whether the increased reserves are just a part of the flood of troubled mortgages or whether they are expanding their interpretations of what constitutes an eligible mortgage under existing representation and warranty provisions.

"Fitch is concerned that a more aggressive request for loan repurchases could potentially expose banks with large mortgage origination operations to future losses that have not been previously incorporated into Fitch's existing exposures, and effectively into current ratings," the report said.

Under a mild loss scenario, where the banks buyback 25% of delinquent loans and recover 60% of the money, Fitch expects cumulative losses around $17bn.

Under a moderate loss scenario, in which the banks buyback 35% of delinquent loans and recover 55% of the money, Fitch expects losses around $27bn.

Under a more adverse scenario, if banks repurchase 50% of troubled mortgages and recover only half of the original investment, Fitch expects losses of about $42bn.

These figures do not include the banks' ability to cure deficiencies in loans which could lessen loss. Fitch believes the moderate scenario is the most likely and said it will continue to monitor the on-going developments between banks and the GSEs related to mortgage loan repurchases.

Write to Christine Ricciardi.

Mortgage rates continue to tumble, according to Freddie Mac, with the average 30-year fixed rate reaching another record low of 4.42%. There is no consensus this week on rates, as another index reports the 30-year fixed rate climbed.

Freddie Mac said the average 15-year adjustable-rate mortgage for the week ended today remained flat with the prior week at 3.9%.

Both rates have now declined for nine straight weeks and are at the nadir. The GSE began publishing 30-year fixed-mortgage averages in 1971 and added the ARM data to its weekly primary mortgage market survey 1991.

Freddie Mac deputy chief economist Amy Crews Cutts said "investors in long-term bonds appear very confident that inflation will remain in check, and as a result long-term fixed mortgage rates have continued to fall."

"The 12-month growth in the core consumer price index has held at only 0.9 percent for four straight months ending in July," Crews Cutts said. "The last time price growth was this low was the year ending January 1966."

She also said construction of single-family homes fell for the third-straight month in July to 432,000 homes, which is the lowest since May 2009.

Meanwhile, the most-recent Bankrate survey of large banks and thrifts showed the 30-year fixed mortgage rate climbing to 4.63% from 4.57% a week ago. The firm’s data pegged the 15-year fixed rate at 4.11% up 5 bps from the prior week, and the average five-year adjustable-rate mortgage of 3.95% was up 3 bps from 3.92% last week.

With rates at record lows, refinancings are way up and accounted for more than 80% of all mortgages written last week.

Write to Jason Philyaw.