Fannie Mae sets up stiffer loan criteria. Mortgage underwriter's action prompted by rising defaults

Home mortgages will be somewhat tougher to get as a result of moves being announced by the nation's largest mortgage supplier, the Federal National Mortgage Association. Fannie Mae, as the association is dubbed, announced Monday that it was tightening its home-mortgage requirements to cut down on future foreclosures.

Fannie Mae and the rest of the lending industry have been repossessing homes at an alarming rate. Other mortgage lenders are expected to follow Fannie Mae's lead in boosting income requirements and otherwise tightening standards.

``Fannie Mae sets the standards'' as a result of its size, says Jesse Abraham, housing expert at Data Resources Inc., an economic forecasting firm. The government-chartered, privately owned corporation owns or guarantees 1 out of 10 home loans in the United States.

Fannie Mae buys mortgages on low- and middle-income homes from local banks and savings and loans, thus replenishing the local bank's supply of money to loan. Fannie Mae then packages these loans and sells them to investors.

The moves to tighten credit requirements are aimed at curbing future foreclosures on home loans. With home prices rising slowly in most parts of the US and falling in others, families with financial problems are more likely now simply to walk away from their home when they fall behind on payments. Fannie Mae is now trying to dispose of 7,800 homes, more than double the figure of a year ago.

Among the steps it is taking, Fannie Mae is:

Boosting the amount of income required for low down-payment loans since studies show equity in a home is the ``most critical element'' in the soundness of a loan, says Fannie Mae chairman David O. Maxwell. On loans with 5 percent down, mortgage payments may no longer be more than 25 percent of a buyer's gross income, vs. 28 percent in the past.

That boosts from $36,814 to $41,232 the annual income needed to buy the median-priced existing home, which costs $76,500. This assumes a 5 percent down payment and a 12.2 percent fixed-rate loan. To buy the same home with the same down payment and a 10.8 percent adjustable-rate mortgage (ARM) would now require $37,488 in income, vs. $33,471 under the old rules.

Stopping purchases of certain kinds of ARMs that have features that could erode a borrower's equity in home. Fannie Mae will only buy ARMs that include a cap on how high the loan's interest rate can rise. And it will no longer purchase loans that have graduated payment features.

Mr. Maxwell says the moves, which take effect Oct. 15, are ``not a radical shrinking of the opportunity'' for home ownership.