The annual fight over whether to allow the government to back higher-priced mortgages is shaping up to be a key proxy in a larger ideological war over housing finance reform.

Congress is due to decide in the next week and a half whether to increase the maximum size of mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).

Neither supporters of the measure nor its opponents are sure what the outcome will be, but most see it as significant in the broader debate over the future of the housing finance system.

"I cannot place any odds on it," said Lawrence Yun, chief economist at the National Association of Realtors, one of the groups lobbying for the higher limits. "But just a couple of months ago, people thought this was a dead-on-arrival issue, and the Senate passed it easily. And we hope that the House of Representatives gets onboard."

The Obama administration and top House Republicans agreed earlier this year that the conforming loan limit, which had been temporarily raised to $729,750, should be allowed to decrease when it expired on Sept. 30.

But even after the decline occurred, the Realtors and other housing groups kept pushing to extend the higher limit, arguing that by allowing it to fall to $625,000, it was hurting the housing market.

The Senate unexpectedly revived the issue last month by passing 60 to 38 an extension of the higher limits until the end of 2013. The measure was attached to an appropriations bill that must be reconciled with the House version.

The move revived the push for higher loan limits, but also tied its fate to a host of other unrelated measures.

Now a bipartisan group of House and Senate lawmakers is looking to resolve not only the dispute over mortgage limits, but also funding for a law-enforcement program along the border with Mexico, and funding for a child-nutrition program, among many other issues.

The negotiations are likely to result in an appropriations bill that should be approved by both the House and Senate sometime next week. Whether the higher loan limits will be included is ultimately up to the House and Senate members of the appropriations committees who make up the majority of the panel tasked with reconciling difference between the two bills, though party leadership is expected to wield a lot of influence. (The House version does not include a conforming loan limit extension.)

The higher loan limits have much stronger support among Democrats than Republicans. Of the 17 senators on the conference committee, all nine Democrats and one Republican voted for the higher mortgage limits, while the other seven Republicans voted against them.

Likewise in the House, the GOP leadership of the House Financial Services Committee is on the record as opposing the higher limits. But a relatively small group of House Republicans, most of whom represent districts with high housing costs, have allied with a larger group of Democrats who favor the higher limits.

Rep. Scott Garrett of New Jersey, who is leading the charge against the higher limits, is building his pitch around the idea of Republican Party unity.

In an interview he noted that the majority of Senate Republicans opposed the higher limits. When push comes to shove, he said the top House Republicans should hold firm, suggesting that the issue is unlikely to be a deal-breaker in the Senate.

Garrett also organized a letter from several House Republicans that urged conferees to remove the Senate's loan limit provision.

"Raising the conforming loan limits would undermine efforts to wind down. Fannie Mae and Freddie Mac and to limit the risks of further government bailouts," the letter said. "While some worry that lower loan limits will cause new hardship in parts of the country where residential real estate is more expensive, there is no evidence that interest rates have spiked on 'jumbo-conforming mortgages,' that home prices have declined or that mortgage credit has dried up."

The letter also noted that the Obama administration is on record opposing the extension of the limits. Still, sources close to the negotiations in Congress insist the White House has largely stayed clear of the current fight.

Meanwhile, advocates on both sides of the debate are pressing their respective cases on Capitol Hill.

The National Association of Home Builders, which supports the higher limits, is using its website to urge its members to set up meetings with members of Congress. The Web site provides a series of talking points, including: "This is not the time to reduce housing demand and exacerbate the current housing downturn."

"Certainly there's resistance by many members of Congress," Jim Tobin, chief lobbyist for the home builders association, said in an interview. "But we think we have a good case to make, and we're making it on a representative-by-representative and district-by-district and county-by-county basis."

Tobin added that "it's a fight to keep the housing market strong in this downturn. And we think it's a fight for the future role of the federal government in housing."

Brian Chappelle, a partner at Potomac Partners, a consulting firm that specializes in mortgage finance, argued that it's prudent for the government to spread its exposure to the housing market, in order to include wealthier borrowers with high-balance mortgages.

"Higher-balance loans perform better than lower-balance ones," Chappelle said. "To me it's good fiscal policy as well as good housing policy."

But those on the other side of the debate note that the government has very little experience with mortgages as big as $700,000.

"My experience with FHA, whenever they get into an area that's new, it usually doesn't end well," said Edward Pinto, a resident fellow at the American Enterprise Institute, who made his argument to a group of House members in a meeting on Capitol Hill last week.

In an interview, Pinto said that as long as the government has such a large footprint in the U.S. mortgage market, the private sector cannot compete.

"If not now, when? The housing lobby is always crying chicken little," Pinto said. "The message that Congress is going to give, if they approve this, is 'We want business as usual for Fannie, Freddie and FHA.'"

Sources on both sides of the debate pointed to one potential wildcard that they said could affect the outcome in Congress. Next week the FHA is scheduled to release the results of its most recent actuarial review, which provides an estimate of FHA's long-term fiscal health.

If the actuarial report is released prior to the conclusion of the conference committee's work, and the report shows that the FHA's projected balance has slipped into negative territory, it could hurt support in Congress for the higher loan limits.

"That will have a significant impact, I think, on the viability of the legislation," Chappelle said.

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