* Bill raises FHA's loan limits, not Fannie, Freddie's
* Restores cap for FHA mortgages to as high as $729,750
* Moves to Senate for final approval
WASHINGTON, Nov 17 (Reuters) - The U.S. House of Representatives on Thursday approved a bill to raise the maximum size of mortgages the Federal Housing Administration can insure, sending it to the Senate for final approval.
The measure would push the so-called FHA conforming loan limit in the highest-priced real estate markets back up to $729,750 through 2013, from $625,500, a sign of lawmaker concern over the still-depressed state of the housing sector.
The limits, which vary from market to market, were temporarily raised for FHA and Fannie Mae and Freddie Mac during the financial crisis when banks became reluctant to lend. They automatically dropped back on Oct. 1.
Lawmakers decided not to raise the loan level for Fannie Mae and Freddie Mac , which have soaked up about $169 billion in taxpayer aid, as they sought to strike a balance between supporting the market and starting to shrink the government's housing footprint.
Seeking to avoid a polarizing debate, members of the House and Senate decided to link the mortgage measure to must-pass legislation that includes funding for a large swath of federal programs, from food inspection to law enforcement. The bill passed on a 298 to 121 vote.
FHA, which does not make loans, provides mortgage insurance to borrowers without enough of a down payment to qualify for prime loans. With an FHA loan, home buyers can put down as little as 3.5 percent.
The agency, which is mainly funded through insurance premiums it brings in, backed about one-third of loans used to purchase homes last year.
FHA, Fannie Mae and Freddie Mac have seen their share of the mortgage market swell as private lenders retrenched; they now back about 90 percent of all new residential loans.
The measure to raise the FHA loan limits still has to pass the Senate before becoming law; Senate approval could come as early as Thursday night with lawmakers laboring against a Nov. 18 deadline, when current government funding expires.
The Obama administration and many lawmakers of both parties want to reduce the government's role in supporting the housing finance system, and the White House sees expiration of the higher loans limits as a first step.
Some Republicans splintered from their party's general consensus that the government should no longer risk the cost of subsidizing home loans on a grand scale. Lawmakers from states with pricey real estate markets, such as California and New York, argued that withdrawing support could hurt the market.
The housing industry and consumer advocates mounted an intense lobbying effort to convince officials the time was not yet ripe to reduce government support.
Some conservative groups fought raising the loan limits, with the influential Club for Growth warning that the government was distorting the market and impeding a recovery.
FHA, which traditionally has supported low-to-moderate income households, said on Tuesday that its capital reserves had dwindled over the past year. But it rebutted the contention of some analysts that it will likely need to turn to the U.S. Treasury for a bailout.