In an effort to return to more prudent underwriting, Fannie Mae announced that at the end of next month it is tightening lending standards for adjustable rate and interest-rate only mortgages.

First, to protect consumers from the potential impact of payment shock from adjustable rate mortgages by qualifying them for potential upward adjustments to their housing payment, home buyers who acquire an ARM with an initial fixed-rate period of five years or less must now qualify at the note rate plus 2% or at the fully indexed rate.

The impact of this change won’t immediately be felt in the housing market because with currently low interest rates most consumers are choosing the security of a fixed-rate mortgage. Last year, only 3% of consumers chose a conventional ARM, and through September of last year just 1% chose an FHA ARM.

ARMs will become more popular as interest rate levels increase.

Fannie Mae also is making changes to requirements for interest-only mortgages, structuring this option for borrowers who are in a position to choose it as a financial management tool rather than as a tool to make their monthly payments more affordable.

To be eligible for interest-only loans, borrowers must demonstrate the ability to qualify for the loan when the interest-only feature ends and the payment is based on principal and interest. The borrower must also have a credit score of at least 720 and have 24 months of reserves at a minimum.

Fannie Mae also announced the retirement of seven-year balloon mortgages as a standard mortgage product. Balloon mortgages typically offer lower interest rates but leave a significant balance due at maturity.

“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, a senior vice president at Fannie Mae, referring to changes described in Announcement SEL-2010-06.

The changes for ARMs and interest-only mortgages are effective for new loans submitted to Fannie Mae for purchase starting on June 19.

For more information, e-mail Steve Linville at NAHB, or call him at 800-368-5242 x8597.

Register for the Spring Construction Forecast Conference Webinar on May 18

Register for the 2010 Spring Construction Forecast Conference webinar to be held from 2:00-4:00 p.m. EDT on Tuesday, May 18.

Mark Zandi, of Moody’s Analytics, and Chris Varvares, of Macroeconomic Advisers, will join NAHB Chief Economist David Crowe for a macro-level look at the state of the nation’s economy and its impact on housing.

To register, visit www.nahb.org/cfc.