A bipartisan group of lawmakers on the House Financial Services Committee agree that mortgage-backing giants Fannie Mae and Freddie Mac need a new independent regulator, but disagreement over whether they should use funds from their investment portfolios to create an affordable housing fund could stymie legislation to institute stepped-up oversight.

The Federal Housing Finance Reform Act (H.R. 1427), introduced Friday by House Financial Services Chairman Barney Frank (D-Mass.), a longtime champion of affordable housing, followed eight years of negotiations with the Treasury Department and has attracted supporters in both parties.

The legislation would create the Federal Housing Finance Agency as the new independent regulator to oversee Freddie Mac, Fannie Mae and Federal Home Loan Banks. The renewed call for reform comes after Freddie Mac and Fannie Mae’s accounting practices that created an overstatement of earnings and an understatement of risk, came under fire. The new agency would replace the Office of Federal Housing Enterprise Oversight, which currently oversees the government-sponsored enterprises.

“This bill creates the kind of tough regulatory oversight that companies this big and complex require, addresses the risk their portfolios present to taxpayers and the financial system, and improves their performance in providing affordable homeownership opportunities,” Rep. Richard Baker (R-La.) said in a statement introducing the bill.

The affordable housing fund provision, which is expected to be controversial among Republicans, would not involve taxpayer funds. Rather, it would require Freddie Mac and Fannie Mae to contribute a percentage of their investment portfolios to the affordable housing fund beginning in 2007. The fund would expire in 2011.

Proceeds from the fund’s first year would be allocated to hurricane-stricken Gulf Coast areas. Seventy-five percent would be awarded to Louisiana and 25 percent to Mississippi. Over the following four years, the funds would be allocated to states based on a formula to be created by HUD using such factors as population, housing affordability, the percentage of low-income families as well as the extent of substandard and aging housing.

Rep. Spencer Bachus (R-Ala.), the committee’s ranking member, has expressed his concern that the proposal could be considered “a tax on lower and middle income homeowners to finance a government housing program, the need for which is debatable.”

Fellow Republican Scott Garrett (N.J.), shares Bachus’ view, calling the fund a “mortgage tax increase” and arguing that Fannie Mae and Freddie Mac will simply pass the costs along to homeowners.

The fund would be managed by the newly created regulator, which would issue and enforce management and operating standards including credit, interest rate, market risks, liquidity and investments.

Language creating the fund was included in last year’s House-passed measure, but would have used company profits to fund it. The measure won house passage 330-91, but disagreements over risks concerning Fannie Mae and Freddie Mac’s investment portfolios between Congress and the Bush administration ultimately killed the measure.

Congress chartered the mortgage giants to create a secondary mortgage market to help stabilize the supply of funding to mortgage lenders, freeing up banks to make more loans making the mortgage market more liquid.

“Improved regulation will provide a means to achieve out ultimate goal of expanding the supply of affordable mortgage credit across the country,” Rep. Gary Miller (R-Calif.) said in a statement.

Community bank and mortgage lenders support legislation that would create a regulator for mortgage giants Fannie Mae and Freddie Mac, but warn that limiting the types of products their portfolios may carry could disrupt their primary function.

Scott Stern, CEO of Lenders One, and chairman of the National Alliance of Independent Mortgage Bankers, testified before House Financial Services subcommittee on capital markets, insurance and government sponsored enterprises, that arbitrarily limiting the size of Freddie Mac and Fannie Mae’s portfolios based on the affordable housing program, would limit the revenue they make and the service they can provide. While the bill doesn’t directly limit the size of their investment portfolio, it states that the new regulator “shall monitor the portfolio of each enterprise” and “may, by order, require” the companies to shed some of their investments.

The bill differs from last year’s House-passed legislation, reflecting a compromise with the Treasury Department over regulatory provisions to strengthen temporary minimum capital provisions. Frank’s updated version would allow the regulator the authority to establish safety and soundness rules, as well as ones regarding mission-compliant operation of portfolios.

“We’ve been down this road … . We don’t have unanimity but [rather] consensus on the better part of the bill,” Rep. Stephen Lynch (D-Mass.) said.

The Financial Services panel is expected to mark up the legislation by the end of the month, hoping to move it quickly through the House. The measure stalled last session in the Senate.

On Thursday, Frank’s panel is expected to hear testimony from a number of representatives from the mortgage and realtor industry.

National Association of Realtors argues that it is in the best interest of home sellers and buyers for housing GSEs not to become over-regulated and restricted from achieving their mission of providing affordable mortgages to all qualified potential home buyers.