Defaults and pay downs reduced the total amount of outstanding mortgages financed by private securities to below $1 trillion for the first time since 2003, according to Amherst Securities.

The entire private-label market stood at $999.7 billion in July, down from $1.17 trillion one year ago. Over the last year, it declined an average 1.4% per month, according to Amherst.

During the housing bubble, the private market boomed from roughly $600 billion in privately financed loans in 2003 to a $2.2 trillion market at the peak in 2007.

With only a handful of jumbo private mortgage bonds issued since the credit markets collapsed that year, investors and lenders relied on taxpayer-funded Fannie Mae, Freddie Mac and Ginnie Mae.

Both Fannie and Freddie combined to pull nearly $190 billion from the Treasury Department since 2008.

Laurie Goodman, top analyst at Amherst, called the $1 trillion mark a "psychological barrier."

According to government officials, there will be no proposal to reform the housing finance market "any time soon."

Goodman forecasts that without revived private-label MBS issuance, the market could drop to $750 billion by the summer of 2014 and $500 billion in 2017.

These bonds are also outperforming agency-backed securities. Investors saw roughly a 3.6% return on the private MBS in July, compared to just over 2.8% yields on government-backed mortgage bonds, Amherst said.

Delinquencies are starting to improve as modifications begin to recede. Roughly $8.4 billion in loans were liquidated out of private-label pools in July, down from $9.2 billion the month before.

The amount of loans at least three months past due declined every month since the beginning of 2010 to roughly $275 billion in July.