The Federal Reserve may be further expanding the pool of counterparties for draining cash out of the financial system by inviting government-sponsored enterprises to the list. The inclusion of GSEs, which include mortgage giants Fannie Mae and Freddie Mac , aims to smooth the central bank’s reverse repo operations when the time comes to start withdrawing the massive amount of cash pumped into the economy in the wake of the 2008 financial crisis. The news came in the New York Fed released Tuesday. The Fed already conducted some tests on reverse repos and has expanded the number of money-market funds as eligible counterparties in addition to the 20 primary dealers — major banks that trade directly with the Fed. In a reserve-repo operation, the central bank lends securities like Treasurys to the counterparties, draining money out of the financial system for a certain period of time. Reserve repos are one of the tools the central bank said it can use to end the quantitative easing measures it’s employed to stimulate the economy, including the $600 billion Treasury bond buying program that is set to conclude in June. The Fed’s balance sheet has surged to over $2 trillion since the financial crisis.

Last night we discussed the NY Times article: I out that the RealtyTrac estimate of 872,000 REO (lender Real Estate Owned) was probably too high, and I also noted that there are approximately 2.25 million homes currently in the foreclosure process. There are another 1.8 million homes with the borrower more than 90 days delinquent - so there is more to come. I'd like to add these two table to hopefully clarify the situation. The first table shows REO inventory in Q1 2011 by Fannie, Freddie, FHA, PLS (Private Label Securities). Tom Lawler sent me the FHA data (released today) and the PLS data (an estimate from Barclays Capital). Single Family REO Inventory: Number of Properties Q1 2011 Peak Quarter Peak Fannie Mae 153,224 Q3 2010 166,787 Freddie Mac 65,159 Q3 2010 74,897 FHA 68,997 Current quarter 68,997 PLS 171,566 Q3 2008 436,270 Subtotal 458,946 Q3 2008 570,634 Banks & Thrifts ??? Note: The banks and thrifts will be added when the Q1 Quarterly Banking Profile is released this week. Last quarter the total of all REO was close to 600 thousand, and this quarter will probably be a little lower. The peak for PLS was in Q3 2008, and their REO inventory has been declining steadily. It now appears both Fannie and Freddie are selling more REO than they are acquiring. However it is important to note that foreclosing isn't the only solution. Some loans are cured by the borrower, other loans are modified (with various methods), and some homes are "short sales" with the lender agreeing to sell for less than the amount owed. Single Family Activity in Q1 2011 Freddie Fannie FHA Total REOs Acquired 24,709 53,549 23,739 101,997 REOs Sold 31,628 62,814 15,581 110,023 Mods and Short Sales 1 62,641 78,079 60,000 2 200,720 1 Includes a few deed-in-lieu of foreclosure that become REO. 2 Estimated based on last 6 months. First, the F's (Fannie, Freddie and the FHA) will probably foreclose on close to 500 thousand homes this year since they are picking up the pace...

Well. Isn’t this a welcome development? Last week, we heard the announcements by New York Attorney General Eric Schneiderman that his office is in mortgage securitization — originally focused on Goldman Sachs, Bank of America, and Morgan Stanley, this morning expanded to include JPMorgan, UBS, and Deutsche Bank. Previously, the Florida AG had published a brutal analysis on . We now learn that California is stepping up to the plate: California Attorney General Kamala Harris is creating a 25-person task force to target mortgage fraud of any size. It includes a team of 17 lawyers and eight special agents from the state Department of Justice. The focus will be on three key areas: • Corporate fraud : including instances in which bundled mortgages were sold as securities to the state or its pension funds under false pretenses, using California’s False Claims Act , which makes false claims submitted to the state a felony; • Scams : including instances in which consultants, lawyers and others took fees from people in foreclosure, saying they would help the homeowners get loan modifications or other remedies, but delivered nothing. • Origination Fraud : Fraudulent lending practices, including deceptive marketing, failure to fully disclose loan terms. This includes qualifying people for loans who couldn’t afford the terms . Note that this initiative is distinct from the multistate investigation because “ it would go after all aspects of the mortgage-lending business .” That statement makes the third item above quite fascinating: It means that the California AG is looking into something that no one else has been willing to touch: Origination Fraud. Any finance firm that lent money to people they knew could not possibly pay is back could be prosecuted under these terms. Even more significant is the possibility of “Systemic Origination Fraud” — the no doc loans where lenders voluntarily kept themselves ignorant about the borrowers ability to repay loans. Understand what the New York...

House Republicans are provoking a fight with the powerful National Association of Realtors by drafting legislation that would curtail the number of loans backed by the Federal Housing Administration, the main source of mortgage money for first-time home buyers. GOP lawmakers have made scaling back government support of the housing market a key priority. However, they are encountering resistance from Realtors and many Democrats, who believe such support is essential to keep the moribund housing market from sinking further. Home buyers who take out FHA loans pay insurance premiums to the government. That money is used to pay claims to lenders when borrowers default. Currently, homeowners are able to take out FHA-backed loans with a minimum down payment of 3.5% as long as they have a relatively healthy credit score. A draft bill to be discussed at a House subcommittee hearing Wednesday would raise the minimum down payment to 5% in an effort to require the agency to make safer loans and stabilize the agency’s finances, which deteriorated in the wake of the housing bust. Rep. Judy Biggert (R., Ill.), said in a statement Monday that Republicans aim to redesign government mortgage programs to strike “the right balance for taxpayers and home buyers.” The legislation also would make a significant cut to the maximum size of loans backed by FHA in many parts of the country. The maximum size of loans that can be backed by FHA in expensive parts of the country is already scheduled to go to $625,500 from $729,750 on Oct. 1. However, in areas where home prices are more modest, that limit is scheduled to fall as low as $271,050. The GOP bill would allow those limits to fall even more—to 125% of a county’s median home price. In some parts of the country, the GOP bill would result in far-lower loan limits than those that are scheduled to go into effect in October, according to data compiled by the Realtors. For example, the limit would be nearly $440,000 lower in Accomack County, Va....

NEW YORK, May 23 (Reuters) – Springleaf REIT is telling stock investors that subprime mortgage lending is a great business, an ambitious argument in a market still reeling from bad underwriting. The company is an offshoot from Springleaf Finance, a former credit arm of American International Group, (AIG.N: , , , ) and it said in a recent regulatory filing that it hopes to raise up to $500 million for a real estate investment trust that will first invest in existing mortgages and other consumer loans. It will be the first REIT to delve into new subprime mortgages since the financial crisis. What’s more some of those loans may one day be packaged into bonds. “A lot of people are trying to get back into that business, but for Alt-A and subprime, I think there’s a lot of risk of potential price volatility as we can see for example now,” said Marina Tukhin, managing director of the asset-backed securities group at Gleacher Descap in New York. Springleaf is looking for capital along with Pacific Investment Management Co and at least six other money managers and private equity firms that have formed new REITs, though those plan an initial focus on mortgages guaranteed by the U.S. government. [ID:nN08167705] The Springleaf filing follows just weeks after Angelo Gordon’s AG Mortgage Investment Trust Inc postponed a $250 million IPO. [ID:ID:nWEN2247]. That offering failed because the REIT didn’t fully identify assets it would buy, turning off skittish investors, said an investor and an analyst. Springleaf is 80 percent-owned by Fortress Investment Group (FIG.N: , , , ), the private equity firm run by former Fannie Mae Chief Executive Officer Daniel Mudd. Fortress acquired its stake in November from AIG’s AIG Capital Corp., which kept the remaining 20 percent in one if its units. Springleaf and a Fortress spokesman declined to comment. The U.S. Treasury owns 92 percent of AIG, and is planning to begin selling its shares with a $9 billion stock sale. American General is no stranger...