Influential housing and banking industry lobbying groups are clashing on Capitol Hill over whether to restore higher limits on the size of government-backed mortgage loans.

The lobbying battle pits real-estate agents against mortgage insurers and even has banking groups on opposite sides. It comes as House and Senate negotiators prepare in the coming weeks to negotiate the details of a bill to fund several federal agencies through next September.

Senate lawmakers want the final bill to include a measure lifting the loan limits, which fell to $625,500 on Oct. 1 in expensive markets such as New York and San Francisco from $729,750. Under the Senate's version of the bill, the higher limits would be restored until the end of 2013.

Powerful Republican lawmakers in the House favor keeping those limits at their current levels. Other Republicans, however, including several from California and New York, want to raise them.

The debate highlights a key question about whether the main goal of housing policy should be to support the weak sector or at least do no harm to it. Others, including many Republicans, argue that the top priority should be reducing the federal government's footprint in the $10.4 trillion U.S. mortgage market, given that the federal government stands behind more than nine in 10 new loans.

The loan limits vary by location, based on local home prices in a particular area. They have fallen to as low as $271,050 in some areas for loans backed by the Federal Housing Administration, which guarantees loans with down payments as low as 3.5%. Limits for loans backed by Fannie Mae (FNMA) and Freddie Mac (FMCC) can fall to as low as $417,000.

The National Association of Realtors is the leading group marshalling forces to get the loan limits restored. Its allies include groups representing title agents, credit unions, home builders and mortgage bankers. The Realtors group is a big player on Capitol Hill, having spent $17.6 million on lobbying last year, according to the Center for Responsive Politics.

Ron Phipps, the trade group's president and a Realtor from Warwick, R.I., said in an interview Friday that he is hearing from agents around the country who are concerned about the drop in loan limits.

The change, he said, has reduced the amount of money potential home buyers can borrow in nearly 660 counties in 42 states. That has forced home buyers to look for cheaper homes or drop out of the market entirely. The change is having the biggest impact in lower price ranges, rather than in high-cost areas, he said.

"We look to prevail and we expect to prevail," Phipps said. "We are working diligently to relay the message for American home buyers and home owners in a big way."

Mortgage insurers, however, are pressing to maintain the current limits. Those companies allow borrowers to take out mortgages with down payments of less than 20%.

Borrowers pay premiums and the mortgage insurers absorb some of the cost when borrowers default. The industry has lost market share to the FHA after the housing bust, and is struggling with losses from defaults and foreclosures.

The Mortgage Insurance Companies of America, which spent $4.1 million on lobbying last year, argues that restoring the higher loan limits would prevent private investment from returning to the U.S. housing market, a goal of both Democrats and Republicans.

Lifting the loan limits, the group argues, will push borrowers back into FHA-backed loans, with taxpayers holding 100% of the risk.

"This is a very small rollback," in loan limits, said Teresa Bryce Bazemore, president of Radian Group Inc.'s (RDN) mortgage-insurance business and president of the industry trade group. Even after the decline in loan limits, "given the fact that home prices have fallen, most borrowers would still qualify for an FHA loan," she said.

Banking groups are divided on the issue. While the Mortgage Bankers Association favors raising the loan limits, the American Bankers Association is opposed to such a move.

"Higher loan limits have done little to increase demand or prevent home prices from falling," wrote Floyd Stoner, American Bankers Association's top lobbyist, in a letter to lawmakers this week. "Private capital must return to housing finance if we are ever going to reform the system and take the taxpayer off the hook for the guarantee of virtually every mortgage made."

-By Alan Zibel, Dow Jones Newswires; 202-862-9263; alan.zibel@dowjones.com

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