Fannie Mae has adapted new standards for buying and securitizing ARMs. The mortgage firm is changing eligibility criteria to protect consumers from potential dramatic payment increases, according to a press release from Fannie Mae.

The changes were also made so that borrowers who hold these types of mortgages can sustain them beyond the initial interest rate period.

"Our goal is to make sure consumers can sustain their mortgages and remain in their homes over the long term, while helping our lender partners offer a range of mortgage products for qualified borrowers," said Marianne Sullivan, senior vice president of single family credit policy and risk management at Fannie Mae. "These policy changes reflect our intention to continue providing liquidity to different market segments by ensuring that support for ARM products remains in appropriate circumstances."

For ARMs with initial periods of five years or less, the GSE will require that borrowers be qualified at the greater of the note rate plus 2% or the fully indexed rate (index plus margin).

The company also said it will still make available an IO loan product, but will change its qualification criteria. The maximum LTV ratio cannot go over 70%, the borrower's credit score must be 720 or higher and the borrower must have a minimum of 24 months of liquid asset reserves remaining after loan closing. Balloon mortgages, which usually offer lower initial interest rates but leave a considerable balance due at maturity, will no longer be eligible, except with special approval.

All loans not meeting the new guidelines must be purchased as whole loans on or before Aug. 31, or delivered into MBS pools with issue dates on or before Aug. 1.

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