Fannie Mae tightens lending standards
WASHINGTON – May 3, 2010 – Battered by a tidal wave of loan defaults, mortgage finance company Fannie Mae is tightening standards for the adjustable-rate and interest-only loans that fed the housing boom and contributed to the bust.

The company said Friday it will require mortgage lenders to consider how high a borrower's mortgage payments might rise after teaser rates expire.

Fannie Mae also will enact tighter standards for "interest only" loans that allow borrowers to avoid making principal payments for several years. To get those loans, borrowers taking out new mortgages must have a down payment of at least 30 percent and enough assets for two months of living expenses.

Washington-based Fannie and sibling company Freddie Mac buy mortgages from lenders and sell them to investors with a guarantee against default. The government has effectively owned them since they nearly collapsed in September 2008.

Keeping them afloat has cost a combined $126 billion so far.

Many consumers did not understand the terms of mortgages they took out during the housing boom. When their teaser rates expired and higher interest rates kicked in, a flood of loan defaults commenced and the housing bubble burst more than three years ago.

Fannie Mae's new rules, which go into effect in September, affect loans that adjust in five years or less. Those mortgages commonly reset based on the yield investors receive for U.S. Treasury debt or the London Interbank Offered Rate, also known as Libor.

Fannie Mae said lenders that make adjustable-rate mortgages are required to evaluate whether borrowers can make payments after the loan resets. They must calculate whatever is greater: two percentage points above the current index level, or the current index level plus an extra margin charged by the bank.

"Our goal is to make sure consumers can sustain their mortgages and remain in their homes over the long term," Marianne Sullivan, Fannie Mae's senior vice president of single family credit policy and risk management, said in a statement.

The new standards, however, do not take into account the possibility that rates could jump dramatically. Borrowers would be qualified based on current levels for interest rates, which have been extraordinarily low.

The Federal Reserve has held its target range for its bank lending rate between zero and 0.25 percent, where it's remained since December 2008. Fed Chairman Ben Bernanke and his colleagues said they have leeway to hold rates at record lows because inflation is likely to stay subdued because of "slack" in the economy.

Copyright 2010 The Associated Press