Ten years after the global financial crisis, the housing and mortgage sector that acted as its primary catalyst is once again starting to show worrisome signs. 

There’s no doubt that the mortgage backed securities industry is better off than it was a decade ago. This is partly because of government support and partly because lending standards have risen. At the same time, riskier non-agency MBS issuances (AKA "private label" mortgage backed securities) have declined.

But now the Federal Reserve is starting to back out of the industry that it once saved, spurring concerns of increased volatility. Participants in the industry are reportedly "on guard" for new types of weakness, as the Trump administration seems to be looking for ways to continually loosen regulations instead of allowing rising rates to cool markets off.

Bryan Whalen, a portfolio manager at TCW Group Inc., told Bloomberg about government sponsored entities, "Certainly we’ve seen underwriting quality deteriorate.” He prefers non-agency bonds instead of high yield corporate paper due to "[its] as-attractive if not better return profile, the direction of credit fundamentals [being] positive and supply [being] attractive."

The loosening of standards and new affordability programs have had a pronounced effect on new mortgage originations. 30 year loans originated with loan-to-value ratios above 90% have increased to an astounding 35% today from the 5% they were at in 2010, according to TCW, who also noted that there is a rising share of mortgages that have debt to income ratios above the key 43% level. Ideal debt-to-income ratios for new homeowners are generally considered to be at or below 36%.

Once again, investors are peddling the same line that they were peddling prior to the housing crisis: that mortgages in the United States are a great target for consistent and high-quality returns during the late stages of a credit cycle. Liquidity is prevalent and corporate spreads remain near "historic" lows. 

The Bloomberg Barclays US MBS index has generated positive returns every year since the crisis, with the exception of 2013. Mortgage rates have risen slightly and most high risk MBS products have disappeared. Fannie and Freddie remain under government conservatorship, where they have been for over a decade, and average credit scores for borrowers remain higher than they were in 2007.

Eric Schuppenhauer, president of Home Mortgage for Citizens Bank in Providence, Rhode Island told Bloomberg "The GSEs and the Federal Housing Finance Agency have done a good job of keeping credit standards where they should be while still innovating for an evolving market."

This has resulted in fewer mortgages, but that has added to stability in the sector. Agency MBS issuances this year have stood at $130 billion, which is 26% below last year's pace, according to Bank of America.

The elephant in the room remains the Federal Reserve. It took on as much as $1.78 trillion in mortgage backed securities as a result of QE and has lent an air of confidence to investors who believe the Fed will be there to save them from any type of ugly scenario going forward. This has caused volatility in the sector to decline precipitously over the last decade. It also leads to concerns that investors may not be ready for the Fed to exit.

The Fed has started unwinding mortgage-backed securities and, by next month, should be doing so at a rate of about $20 billion per month. They have not announced long-term plans for unwinding and all eyes will be on whether or not the Fed will have the spine to continue unloading securities in the face of any volatility along the way. We have very little faith that they will. 

Kirill Krylov, a senior portfolio strategist at Robert W. Baird & Co., stated: "We are developing a low-volatility addiction. Should the Fed decide to start actively reducing its balance sheet it will have very profound consequences in the mortgage market. The Fed has been buying the most negatively convex MBS. By not reinvesting its paydowns they will be poisoning the well by reducing the quality of the outstanding float."

At the same time, the fate of Fannie and Freddie is still up in the air. It would be a longshot to think that both of these Government sponsored agencies are going to remain in conservatorship as a perpetuity. While they don’t seem to be the top priority for the Trump administration, some GSE investors have pointed out smaller steps the administration has taken that may be foreshadowing a path to an eventual recapitalization. 

For now, the key remains whether or not the FHFA will loosen lending standards further. If history is any indicator, we're sure they will, and it won't be long until we're wondering how we wound up in worse shape than we were in 2008.