Fannie Mae to tighten ARM and IO lending standards

Fannie Mae is finally moving toward sensible lending standards:

Fannie Mae on Friday said it will tighten lending standards on adjustable-rate mortgages and "interest-only" loans that helped fuel the housing bubble and have led to a disproportionate share of losses for the mortgage-finance giant.

The changes, which will take effect in September, will require lenders to qualify borrowers based on whether or not they can afford potentially higher payments once adjustable-rate loans reset, and will require much more stringent criteria for interest-only borrowers.

During the housing boom, borrowers increasingly used adjustable-rate mortgages with low initial rates to buy bigger homes and banked on ever-rising values to refinance before payments rose higher. When prices stopped rising, more borrowers weren't able to sell or refinance to avoid higher payments. That sent defaults soaring. ...

Freddie Mac said earlier this year that it would stop buying interest-only loans in September. Fannie said it will continue to offer such loans, but it will require borrowers to have credit scores of at least 720 and 30% equity. Borrowers must also have at least two years worth of cash reserves remaining after closing.

For adjustable-rate mortgages that reset within their first five years, lenders will have to qualify borrowers under higher payment levels, using the greater of either the current interest rate plus two percentage points, or the current interest rate plus the extra margin charged by the lender.

'bout time. How long ago did the financial crisis start?