patrick.net

Riskier U.S. mortgages are creeping back into the bond market again.

The loans in question are nowhere near the toxic mortgages that brought down the financial system last decade. But they’re being made to people with lower credit scores and with more debt relative to their income. And in separate transactions tied to rental homes, Wall Street banks are putting together securities with fewer safeguards for investors — a potentially worrying sign of complacency.

If the housing market weakens, and unemployment starts rising, mortgage bond investors could find their securities losing value, money managers warn.

“Underwriting starts out very strict and as time goes on, it’s kind of the proverbial frog in the pot of boiling water,” said John Kerschner, head of securitized products at Janus Henderson Group Plc, which manages $372 billion. “The heat keeps going up and up and then you realize, oh, this is really not good.”