It appears that higher premiums are starting to have a profound effect on the Federal Housing Administration’s (FHA) “streamline” refinancing program.

FHA loan production has fallen by nearly 30% during the first five months of fiscal year 2012 compared to the same period in 2011with refis dropping 40%, according to new government figures.

From the end of September through February, FHA lenders originated $76.9 billion of loans (not including reverse mortgages), down from $108.5 billion during the same period in FY 2011.

FHA’s purchase mortgage business has held up pretty well, said Brian Chappelle of Potomac Partners but he added that “refinancings have fallen off a cliff and the reason is the high premiums.”

According to the latest FHA Single-Family Outlook report, refinancings for the first five months of 2012 totaled $29 billion, compared to $53.7 billion during the same period a year ago.

Based on number of loans, conventional to FHA refinancings are off 42% with streamline refis of existing loans plunging 47%.

Meanwhile, mortgage bankers are gearing up for a new program that goes into effect in early June that should boost refinancings of existing FHA-insured loans originated before June 2009. The annual insurance premium on this bucket of loans will be cut to 55 basis points from 115 bps. Also, the current 100 bp upfront premium is being reduced to 1 bp—the lowest possible under the FHA program.

“Lenders are already taking applications,” according to Bud Carter of Potomac Partners.

As many as 3 million existing FHA borrowers could be eligible for this streamline effort.

But Potomac Partners cautions that it’s difficult to tell how many borrowers will actually qualify. FHA has a “net benefit test” for refinancings and applicants cannot roll the closing costs into the loan amount—they have to pay cash.

Still, with FHA mortgage rates at new lows, the program can’t start soon enough.

The average contract interest rate on a FHA 30-year fixed-rate mortgage recently fell to 3.81%, according to a recent survey conducted by the Mortgage Bankers Association. “This is the lowest interest rate recorded in the history of the survey,” the MBA said.

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