WRAPUP 2-US lawmakers close in on extending housing support

* U.S. House, Senate extend higher mortgage loan limits

* Administration supports bill and tax credit extension

* Sen. Dodd predicts Obama would sign expanded tax credit (Recasts, updates with Senate action)

By Corbett B. Daly

WASHINGTON, Oct 29 (Reuters) - U.S. lawmakers on Thursday approved a measure to extend a government prop to the mortgage market, hoping to keep borrowing costs low and foster economic recovery.

The U.S. House of Representatives and the Senate each voted to keep the loan limit for U.S.-backed mortgages of single- family homes at $729,750 until 2011, effectively holding interest rates down for a large swath of U.S. home buyers. The limit was scheduled to shrink to $625,500 at the start of 2010.

The Obama administration voiced support for the legislation, and a separate effort to extend a popular tax credit for first-time home buyers that is set to expire at the end of November.

"This credit has brought new families into the housing market and contributed to three consecutive months of rising home prices nationwide," Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan said in a joint statement.

However, conspicuously absent from the statement was any mention of a possible expansion of the credit to repeat buyers of primary residences, as senators have proposed.

The administration, and some House Democrats, have expressed concern over the cost of expanding the credit when the budget is already under severe pressure. White House economic adviser Lawrence Summers told Reuters last week the administration would prefer to keep the focus on first-time buyers.

DODD PREDICTS OBAMA'S SUPPORT

Senate Banking Committee Chairman Christopher Dodd expressed confidence that Obama would sign the expansion, despite any lingering misgivings over its cost.

"We are going to do this and my guess is the president will sign it," the Connecticut Democrat told reporters, adding that he was convinced House Democrats "see the value of this."

Dodd and other senators agreed this week to extend the $8,000 first-time home buyer tax credit to any first-time buyer who has a purchase contract in hand by the end of April. Buyers would then have through June to close on the house.

They also agreed to expand the credit to allow for those who have been in their home for at least five years to receive a $6,500 tax credit if they buy a new primary residence.

The proposal would also increase the income limits of those eligible for the program to $125,000 per year for individuals and $225,000 for couples.

Senator Johnny Isakson, a Georgia Republican, said the proposal would cost about $10.2 billion over 10 years and would be paid for with offsetting cuts elsewhere in the budget. Simply extending the current tax credit is estimated to cost $1 billion a month.

The Senate is expected to take up the tax credit measure next week as part of separate legislation to extend insurance benefits for unemployed workers. The House, which would also need to approve it, is expected to wait for the Senate to act.

LIFTING THE MARKET

Analysts say both the tax credit and the higher limit on the amount of mortgages that government-controlled finance companies Fannie Mae FNM.N and Freddie Mac FRE.N can buy have helped the housing market, although the tax credit's critics question whether the value is worth the cost.

Without an extension of the higher loan limits, lenders could start pulling in the reins on larger mortgages at current low interest rates, dealing a new blow to housing and the broader economy.

Fannie Mae and Freddie Mac help ensure mortgage credit is flowing by buying mortgages, which they either hold or repackage as securities for investors.

In a letter to congressional leaders on Monday, the Mortgage Bankers Association asked that the higher loan limits be extended before more lenders stop underwriting loans.

Some lenders have stopped providing certain mortgages at current interest rates, uncertain of being able to sell them to Fannie or Freddie and unwilling to keep them on their own books, the industry group said.

"Barring a continuing of both the first-time home buyer credit and the conforming limits, you're likely to see the mortgage market stall again," warned Daniel Penrod, senior industry analyst at the California Credit Union League in Ontario, California. (Additional reporting by Lynn Adler in New York and Andy Sullivan in Washington; Editing by Jan Paschal)