Citing the need to protect borrowers from mortgage payments that potentially balloon out of control, Fannie Mae (FNM) is putting forward new standards for the purchase and securitization of adjustable-rate mortgage (ARM) products. The government sponsored entity is also tweaking its rules on interst0only products. “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,” said Marianne Sullivan, who works on the single family credit policy and risk management at Fannie Mae. For ARMs with initial periods of 5 years or less, Fannie Mae will require that borrowers be qualified at the greater of the note rate plus 2 percent or the fully indexed rate (index plus margin). All loans not meeting the new guidelines must be purchased as whole loans on or before August 31, 2010, or delivered into MBS pools with issue dates on or before August 1, 2010. Fannie is also going to change criteria on interest-only loan products, capped at 70% loan-to-value ratio with the borrower FICO at 720 or higher. Balloon mortgages will no longer be eligible under the new guidelines. Write to Jacob Gaffney. Disclosure: the author holds no relevant investments.