UPDATE 1-Rep. Frank backs higher Fannie, Freddie loan limits

* Loan limits to drop absent congressional action

* U.S. House has acted, but Senate has not

* Time running out with election-shortened calendar (adds background, analysts’ comments)

WASHINGTON, Sept 15 (Reuters) - Congress should extend increased loan limits on mortgages backed by Fannie Mae FNMA.OB and Freddie Mac FMCC.OB that are set to expire at year end, the powerful chairman of the House Financial Service Committee said on Wednesday.

“I hope we do do it before we adjourn” for the congressional recess ahead of the November 2 mid-term elections, Democratic Rep. Barney Frank of Massachusetts Democrat said at a hearing on the future of housing finance.

Congress raised the ceiling on the size of the loans in 2008 to help ease the credit crisis. Analysts warn the distressed housing market could take a fresh hit if they are not extended beyond December.

The House of Representatives in late July voted to extend them through September 2011 as part of an annual spending bill for the Department of Housing and Urban Development.

The Senate, however, has not passed its version of the bill and time is running out before lawmakers leave Washington to hit the campaign trail ahead of the November 2 elections.

The higher limits, which vary by region, top out at $729,750 for single family homes in the most expensive parts of the country, except for Alaska and Hawaii, which have higher limits. Previously the cap was $417,000.

The 12 regular annual spending bills which fund the government are often delayed, and lawmakers typically approve separate stop-gap measures to keep the government funded at existing levels for weeks or months at a time.

Lawmakers could add an extension of the deadline to a temporary spending measure they are expected to pass. It remains unclear how long the measure would remain in force and whether supporters of the loan-limit extension could get the necessary language added to the spending bill.

“If we allow this to expire at the end of the year, it will be impossible to finance homes in most parts of Los Angeles and certain other major cities ... and we will see a double dip recession,” Representative Brad Sherman, a California Democrat, said at the hearing.

Treasury Assistant Secretary Michael Barr told Reuters after the hearing that the Obama administration “would be supportive” of an extension of the higher limits.

“I would be very surprised if it wasn’t extended because otherwise the housing recovery will be even slower than anticipated,” said Brian Chappelle, a housing consultant at Potomac Partner in Washington.

Mahesh Swaminathan, a strategist at Credit Suisse in New York, noted that “there is something like $70 billion to $75 billion in mortgages that have been made in that loan size bucket.”

“If you go back to the national limit (417,000), those borrowers might have to pay much higher rates,” Swaminathan said.

Sherman warned that sellers asking between $450,000 and $800,000 for their homes may not be able to sell even before the limits expire, since prospective buyers would be reluctant to sign a contract without certainty they could get financing.

“The perils of the temporary (ceilings) are illustrated by the current situation” of uncertainty, Sherman told Reuters in an interview. (Additional reporting by Al Yoon in New York; Editing by Andrew Hay)