The Federal Housing Administration (FHA) will "soon" increase its annual premium on Jumbo mortgages by 25 basis points, according to government budget documents released Monday morning.

The increase means FHA loans with a principal balance above $625,500 will carry a 140-basis point annual premium.

On lower balance loans, FHA is raising the annual premium by 10 basis points.

FHA currently charges a 1% upfront fee and a 115 bp annual premium on residential mortgages with loan-to-value ratio higher than 95%.

"These [premium] increases will bolster FHA's capital reserves, accelerating the point at which FHA will regain compliance with its capital reserve ratio," according to the President's Fiscal Year 2013 budget proposal.

Some analysts claim the higher annual premium will reduce demand for FHA jumbos and push more borrowers to seek out private jumbo loans.

Congress instructed FHA to increase its annual premium by 10 bps late last year when lawmakers passed a bill to extend a payroll tax reduction for two months.

In other FHA news, the Obama White House, in its new budget, predicts that the FHA Mutual Mortgage Insurance fund will return to health by 2015, but warns that the agency's book of business is vulnerable to what it calls “Black Swans.”

Budget language released Monday morning describes Black Swans as “outlier events that are difficult to predict and have deep effect,” adding that “These amplify otherwise normal estimation errors, contributing to large reestimations.”

At last check, FHA's MI fund had just $2.5 billion of capital on a $1 trillion portfolio, giving it a slim capital ratio of 0.24%.

In its 2013 budget the White House says the MIF ratio “will again exceed 2 percent by 2015” and adds that a low capital ratio does not threaten FHA's operations.

A few weeks ago rumors were circulating that the White House might predict a negative position for the MIF – based on more pessimistic estimations on where housing values might be headed.
FHA said it plans to “selectively” increase annual premiums on “market rate housing loans.”
FHA insurance helps fund almost one in four purchase money loans, compared to a market share peak of 30% in 2009.

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