Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) has come out against a proposal to divert a portion of the profits of housing giants Fannie Mae and Freddie Mac to pay for affordable housing, a committee spokesman said yesterday, perhaps undermining Democratic support for legislation to strengthen oversight of the two companies.

Committee spokesman Andrew Gray said Shelby is concerned about any program that would "encourage" the companies to take on more risk, as they have done in recent years by expanding their investment portfolios to make more money.

"Shelby believes there are better mechanisms to refocus them on affordable housing without providing perverse economic incentives," Gray said.

Fannie Mae and Freddie Mac buy mortgages from banks and other lenders to keep the housing markets supplied with cash, and under their charter are supposed to encourage homeownership, particularly among low- and middle-income families.

Shelby's position could complicate efforts to strengthen regulation of the two companies, which have been shaken by accounting scandals and beset by concerns that their size poses a risk to the economy. The House Financial Services Committee last month approved creation of a more powerful regulator for the companies only after the low-income housing proposal was included in the bill to win Democratic support. In addition, the White House has complained that the House bill does not sufficiently restrict the size of the two companies.

Shelby's position also puts him at odds with Senate Democrats, led by Sen. Jack Reed (D-R.I.), who sponsored a similar low-income housing proposal last year. Reed said he planned to reintroduce the idea when the committee takes up the legislation next month, and that he would be "hard pressed" to support a bill that did not include more money for low-income housing.

The proposed set-aside program was not expected to be a source of contention in the Senate because the Banking Committee had approved Reed's program last year as part of an earlier effort to tighten regulation of Fannie Mae and Freddie Mac. But that legislation never made it to the Senate floor.

Gray said yesterday that the committee adopted the proposal last year "to demonstrate that even with an expansive new affordable housing program we still would not be able to attract enough Democratic support to move the bill through the Senate. It was not intended as an endorsement of the substance."

The low-income-housing proposal is also opposed by a group of conservative House Republicans, who criticize it as a "slush fund" that Fannie Mae and Freddie Mac would use to build political support.

Members of the conservative Republican Study Committee have circulated a letter asking the House leadership not to consider the bill on the House floor if it contains the affordable housing set-aside. So far, they have gathered more than 30 signatures, according to a spokesman for Rep. Mike Pence (R-Ind.), who is chairman of the study committee.

Peggy Peterson, a House Financial Services Committee spokeswoman, said concerns over the set-aside aren't likely to derail the bill. "We've had great support from the House leadership. This bill is headed in the right direction . . . and the normal course of the legislative process is playing out," she said.

A House floor vote is expected before the August recess.

Reed said a new regulator for Fannie Mae and Freddie Mac would ensure that the money was spent properly.

"The underlying principal of this bill is creating a strong regulator. How is it that a regulator who oversees the safety and soundness of Fannie and Freddie is somehow unable to insure the safety and soundness of this particular program?" said Reed's spokesman, Greg McCarthy.