WASHINGTON Nov 14 (Reuters) - Republicans and Democrats in the U.S. Congress on Monday agreed on a measure that would increase the maximum size of mortgage loans that can be insured by the Federal Housing Administration, a key funding source for U.S. home loans.
The measure to raise the loan limits backed by the FHA still has to pass the Republican-led house and Democrat-controlled Senate before it becomes law, but the agreement by a bipartisan panel of lawmakers from both chambers indicates a strong likelihood of final approval.
The limits, which vary by real-estate markets, fell at the end of September for mortgages insured by the FHA, as well as government-controlled Fannie Mae and Freddie Mac . The higher loan limit was temporarily raised for Fannie, Freddie and the FHA during the financial crisis and it automatically dropped back to $625,500 on Oct. 1.
The agreement reached among House and Senate leaders excludes those loans guaranteed by Fannie and Freddie, which provide about half of the funding of all U.S. residential home loans. The deal would only impact FHA's loan limits, restoring the cap for mortgages the government insures to as high as $729,750 in high-cost real estate markets through 2013.
The agreement follows a polarizing debate over the size of mortgages the federal government should back. The measure to increase the legal limits on the size of mortgages the FHA can insure was included in a bill to fund a large swath of government programs, from food inspection to law enforcement, that is seen as must-pass legislation for many lawmakers.
The legislation containing the amendment extends funding on a temporary basis for many government programs through Dec. 16, giving Congress additional time to finalize funding levels.
The House and the Senate must pass the bill by Nov. 18, when current funding expires.
The Commodity Futures Trading Commission, tasked with implementing several reforms of the Dodd-Frank financial overhaul, is given a budget of $205 million, roughly 50 percent below what the Obama administration requested.
Budget battles have raised the possibility of a government shutdown twice so far this year, as Republicans have pushed for steep spending cuts. Aides say they do not anticipate that this bill will lead to another round of budget brinkmanship.
The divisive debate on the loan limits will continue to play out this week as lawmakers push to pass the short-term funding measures. The Senate had pushed a measure that would raise the maximum size of a home loan backed by Fannie Mae, Freddie Mac and the FHA to $729,750.
The House did not include the higher limits in its bill to fund federal agencies through next September, instead favoring to keep the cap at $625,500.
The reduction in the loan limit was part of an effort to start reducing the government's footprint in the mortgage market and revitalize the role of private lenders -- an effort supported by President Barack Obama and Federal Reserve Chairman Ben Bernanke, as well as some Republicans in Congress and the FHA itself.
Critics, including several prominent House Republicans, opposed the higher loan limits because they believe the government's extensive role in the housing market needs to be curtailed to protect taxpayers.
However, some Republicans, including several from California and New York, argued the housing market was still too weak to lose government support in higher-cost neighborhoods.
Some analysts say only a sliver of the overall U.S. housing market, about 2 percent to 3 percent, was impacted by the recent decrease in the limits. But some housing advocates believe a higher limit is warranted given the persistent weakness in housing.