Potential buyers of relatively expensive homes may find themselves unable to tap government loan guarantees beginning Oct. 1, a move hotly contested by Realtors and mortgage bankers.

Loans guaranteed by the Federal Housing Administration allow homebuyers to make purchases with down payments as low as 3.5 percent and get mortgages for up to $697,500 in San Diego County and up to $500,000 in Riverside County. San Jouquin County is going to be 417,000.

In addition, those are the largest mortgages that government lending giants Fannie Mae and Freddie Mac will buy from lenders, holding down the cost of those loans. The government raised limits to these levels in March 2008 to replace a missing-in-action jumbo loan market after lenders stopped making such mortgages in the wake of a foreclosure crisis.

Now the government wants to make room for private lenders, and the limits will drop in October to $546,250 in San Diego County and $355,350 in Riverside County. In our Area the Tracy Area and San jouquin County the loan limit will be 417,000.

Realtors and mortgage bankers said the move will depress prices, as fewer buyers have the larger down payments ---- typically 20 percent of the purchase price ---- that would be required without loan guarantees, and removing government support could raise the cost of borrowing at the higher amounts. Realtor organizations are pushing to get the higher limits extended past Oct. 1, but some local Realtors and economists said letting the limits fall may be the best option.

"They bolstered the limit when the jumbo market had completely collapsed," Chris Thornberg, an economist with Beacon Economics, said in an email. "There was nothing else out there. The jumbo market is working again."

North San Diego County, which has higher home prices than most of the rest of the state, would feel the pinch of lower limits more keenly.

The median price of houses and condos in North County reached $385,000 in 2010, according to an analysis of county assessor data. The reduced mortgage limit would have affected 1,481 of 2010 sales, about 11.6 percent of the annual total.

Peggy Yeomans, chairman of the board of the North San Diego County Association of Realtors, said forcing more potential buyers to put down 20 percent would keep people out of the market. 

"If we keep throwing things in front of (the housing market), I don't see how that's going to help us," she said.

In Southwest Riverside County, where the median price of houses and condos in 2010 was about $200,000, 590 houses would have missed out on FHA financing with lower loan limits, 4.1 percent of all sales.

The small number of sales in that sector is exactly the problem, said Gene Wunderlich, government affairs director of the Southwest Riverside County Association of Realtors.

"It's that whole middle section of the market, that should be rebounding, that needs to be nurtured right now," he said. "This would put a damper on it."

Thanks in part to lobbying from the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association, congressional representatives introduced two bills last month that would extend the current loan limits. But with Congress on recess, Wunderlich said he is worried about running out of time.

Not everyone thinks the loan limits should kept high. Mark Goldman, an instructor at the Corky McMillin Center for Real Estate at San Diego State University, said he thinks lenders are ready to fill a void left by the government.

"It's a slow process. Very, very slowly, more and more lenders are coming to the market and the mortgage insurance is coming back," Goldman said. "It's not the end of the world."

Tyson Lund, a Realtor in Carlsbad, supported lower loan limits because higher down payments create more ownership in a house.

"It forces people to be more homeowner and less speculator," he said in an email.

Thornberg argued that if lower loan limits push down prices, then maybe that's not so bad.

"At any rate, do people who can afford such expensive homes really (need to) be subsidized by the Feds?" he wrote in an email. "And anyways ---- lower prices for homes are bad for commissions ... not for buyers