WASHINGTON -- Fearful of increased competition from the government, large thrifts and private mortgage insurers are lining up against a plan by the Federal Housing Administration to back bigger mortgages.

The FHA wants to raise the size of home loans that it insures from about $152,00O to $173,000.

The change, experts say, would markedly increase the FHA's ability to lend in states with high housing costs, such as California and Connecticut.

Mortgage banks - the main originators of FHA loans - are rooting for the increase, saying it will strengthen the agency's insurance fund. But major thrifts, which focus on conventional mortgages, see the plan as an unfair intrusion.

If the higher limit goes through, FHA lenders are "going to become competitive in upper-middle-class markets that we're strong in," said Louis H. Nevins, president of the California League of Savings Institutions.

CRA Worries

Private lenders are particularly sensitive to this issue because they are under increasing pressure to serve the lower end of the market.

The controversy is likely to come into sharp focus on Thursday at a House Banking subcommittee hearing. Among other things, the hearing is expected to clarify whether Rep. Henry Gonzalez, D-Texas, chairman of the House Banking Committee, will support the expansion.

FHA loans - part of a broader government effort to support housing - offer low down payments and highly competitive interest rates. The government, rather than than lenders, absorbs credit losses arising from the loans.

The plan is to raise the loan limit to 85% of the maximum size of mortgage that can be sold to Fannie Mae and Freddie Mac. Right now, the limit is 75%.

Fannie Mae and Freddie Mac - formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. - buy loans from lenders. For some of the riskier loans, they require private mortgage insurance.

The Mortgage Insurance Companies of America, a trade group that has long been at loggerheads with the FHA, says that a borrower would need an annual income of $71,000 to qualify for a maximum loan.

"We just don't believe the federal government should be serving the wealthiest 13% of borrowers when we are struggling to better serve low-income people," said Suzanne C. Hutchinson, executive vice-president of the trade group.

In a letter sent yesterday to California lawmakers, the Calfornia league points out that the FHA does most of its California business in suburban counties., such as Kern, Fresno, Sacramento, and San Bernardino.

The government program has a much smaller presence in places like Oakland and south central Los Angeles, and authorizing the agency to insure larger loans won't build its lower-income lending, the group said.

By contrast, the large California thrifts do a lot of lending in inner cities but to do that they "have to be able to compete in suburbia," he said.

The thrift and insurance groups are supported by consumer advocates, who also believe that the government program should be better targeted.

"There is a greater need to target FHA resources than there is a need to expand the program to households that can already obtain credit in the conventional market," said Chris Lewis, director of banking and housing policy at the Consumer Federation of America.

But "FHA can't address its basic mission of reaching out to weaker credit risks if it can't put in its portfolio loans with strong credit history and higher loan balances," said Warren Lasko, executive vice president of the Mortgage Bankers Association.

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