Increasing concern over the financial soundness of adjustable rate loan -- and the creditworthiness of home buyers taking them on -- is starting to show up in the way lenders write mortgages. Most are abandoning the low "teaser" rates that were fairly widespread in adjustable rate loan earlier this year, and some are imposing tougher income requirements on adjustable rate loan borrowers or demanding larger downpayments.

But despite stricter lending standards, adjustable rate mortgage (ARMs) accounted for roughly two-thirds of new mortgages in July and will probably end up representing about half of all mortgages written this year. While there is no evidence of a significant shift back to fixed-rate loans, the one-year ARM is losing its edge, particularly as a tool for qualifying low-income buyers.

"ARMs were a controversial instrument that took 10 years to introduce into the system," says Kevin E. Villani, chief economist at Federal Home Loan Mortgage Corp. (Freddie Mac). "There was a lot of experimentation at first, but there's been a lot of tightening up by private mortgage insurers over the last couple of months." At the same time, the secondary market makers have come up with their own guidelines for underwriting ARMs.

Freddie Mac, for one, insists that borrowers be qualified to pay a rate that reflects the cost of the mortgage over time, not the initial discount -- or teaser -- rate. It also recommends that ARMs be written with interest-rate caps or payment caps to protect home buyers from "payment shock." Otherwise, Freddie Mac suggests that the home buyer's monthly housing expense not exceed 25% of gross income, as opposed to the less restrictive 28% expenses-to-income ratio typically used for fixed-rate mortgages. In addition, Freddie Mac requires at least a 10% downpayment for ARMs that feature gradually rising payments or discounts greater than two percentage points below the market rate.

The Federal National Mortgage Assn. (Fannie Mae), which has accumulated $11 billion in ARMs over the past three years, restricts its purchases of one-year ARMs to those loans that are discounted no more than 2.5 percentage points below posted market rates and come equipped with either payment caps or interest-rate caps, or both. Says David O. Maxwell, chairman and chief executive officer of Fannie Mae: "This is quickly becoming a market standard."

Indeed, getting in step with these loan standards, the nation's savings institutions claim they are just as tough in underwriting ARMs as they are with fixed-rate loans.