Fannie Mae Tightens Underwriting for Interest-Only Mortgages

The Wall Street Journal reports:

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.

Fannie and its smaller rival, Freddie Mac, were taken over by the government through a legal process known as conservatorship in September 2008 as rising losses threatened to wipe out thin capital reserves. So far, Fannie and Freddie have required more than $126 billion in taxpayer infusions, a number that is likely to grow.

Too big to fail doesn't apply to fascist Mae... we mean Fannie Mae.