updated 10/26/2005 8:20:28 AM ET 2005-10-26T12:20:28

A plan for tighter supervision of mortgage giants Fannie Mae and Freddie Mac is entangled in a dispute over whether money to house low-income people and hurricane victims can go to community groups that engage in nonpartisan get-out-the-vote drives.

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The White House opposes the legislation on a broader issue: that it would not force the mortgage companies to reduce their huge holdings. The two government-sponsored companies together finance more than three-quarters of the home mortgages in the country, and both have recently had accounting scandals.

A House floor vote on the bill was expected Wednesday afternoon.

The fight in the Republican-controlled House was over restrictions on a special low-income housing fund to be financed by Fannie Mae and Freddie Mac.

The restrictions would prohibit nonprofit community groups from receiving any of the housing money if they have used their own funds for nonpartisan voter registration or get-out-the-vote drives, or, in some cases, lobbying in the last year.

An array of civil rights organizations, unions and faith-based groups, including the NAACP, the U.S. Conference of Catholic Bishops and the American Jewish Committee, joined House Democrats in protesting the proposed ban.

“It’s a direct slap in the face to so many urban organizations,” Karl Frisch, a spokesman for Rep. Louise Slaughter, D-N.Y., said Tuesday.

Opponents of the restriction said current laws provide sufficient safeguards — a ban on lobbying with federal funds and a prohibition against charitable organizations engaging in partisan electoral activities. They also said the ban would violate constitutional free speech guarantees.

The ban was recently attached to the legislation by House Banking Committee Chairman Rep. Michael Oxley, R-Ohio, in a compromise with conservative GOP lawmakers who want to prevent the millions of dollars in new housing money from flowing to organizations that oppose Republican policies.

Many community groups around the country receive and administer housing funds from Fannie Mae and Freddie Mac.

The overall bill cleared the Banking Committee with overwhelming bipartisan support in May. It would create a stronger federal regulator with authority over Fannie Mae and Freddie Mac, which have been major donors to lawmakers of both parties and have wielded great influence in Congress.

The legislation also calls for the companies to devote a small percentage of their annual profits — which could amount to hundreds of millions of dollars — to financing housing for low-income people, with housing for victims of Hurricane Katrina given priority.

The Bush administration opposes the bill because it does not match a Senate measure that would order the two companies to reduce their mortgage investment holdings, worth a combined $1.5 trillion. Federal Reserve Chairman Alan Greenspan has said their holdings must be diminished because their huge debt poses a potential danger to the U.S. financial system.

Fannie Mae and Freddie Mac, both publicly traded, were created by Congress to inject money into the home-loan market by purchasing mortgages and bundling them into securities for sale to investors.

Accounting debacles led to the ouster of top executives at Freddie Mac in mid-2003 and at Fannie Mae last year. Last December, the Securities and Exchange Commission ordered Fannie Mae to restate its earnings back to 2001 — a correction that could reach an estimated $11 billion. The Justice Department is pursuing a criminal investigation.

Washington-based Fannie Mae is the No. 1 U.S. buyer and guarantor of home mortgages and the second-largest U.S. financial institution after Citigroup Inc. Rival Freddie Mac, based in McLean, Va., ranks as the second-largest home-mortgage buyer.

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