WASHINGTON (MarketWatch) -- Members of a House panel on Wednesday approved a new regulator for mortgage giants Fannie Mae and Freddie Mac, but the legislation now heads to the House floor and to the Senate, where its passage is not guaranteed.

Authored by Rep. Richard Baker, R-La., and Michael Oxley, R-Ohio, the bill approved by the House Financial Services Committee replaces Fannie and Freddie''s current regulator with the Federal Housing Finance Agency and also gives the new agency the power to adjust capital levels at the companies. The new agency would also have authority over the Federal Home Loan Banks.

The vote was 65 in favor and 5 opposed.

The bill "strikes the right balance by ensuring strong oversight while at the same time permitting the GSEs [government-sponsored enterprises] to continue to play their important role in the secondary mortgage market," Oxley said in an opening statement.

But Treasury Secretary John Snow offered tepid support for the bill, saying more work needs to be done.

"We will be working with the House and Senate to ensure that the bill is strengthened so that the final product provides for a strong, independent regulator which has all the necessary tools to do the job," Snow said in a statement.

"Directing the regulator to place limits on the size of the GSEs'' retained mortgage portfolio is a critical element of reform," Snow said.

The Bush administration and Federal Reserve Chairman Alan Greenspan have both called for limits on the size of the multibillion-dollar holdings of Fannie and Freddie -- something the Baker-Oxley bill doesn''t spell out.

Fannie Mae FNM offered qualified praise for the bill.

The legislation "is a significant step forward in the process of strengthening the safety and soundness oversight of our company and the GSEs," said Fannie spokesman Chuck Greener. "We are hopeful a bill will be signed into law this year."

Members approved several amendments to the bill but heavily debated an amendment offered by Rep. Ed Royce, R-Calif., that would have prohibited 5% of Fannie and Freddie''s FRE profits from being put into a fund for affordable housing programs.

Fifty-three representatives finally voted against the amendment, while 17 voted for it.

Royce called the proposed affordable housing provision "an experiment in socialism," but other members, including Bob Ney, R-Ohio, supported the provision. "This is a chance to establish a good fund for a good purpose," Ney said.

Members approved amendments including one requiring Fannie and Freddie to disclose their charitable contributions and another that would identify how many subprime loan purchases the companies are involved in.

The new agency, if approved by the full House and the Senate and signed into law by President Bush, would have the authority to adjust levels of minimum and risk-based capital at the giant mortgage finance companies. The agency would also have authority to approve new programs at Fannie, Freddie or the home loan banks.

The Baker-Oxley bill also allows the regulator to close Fannie and Freddie if either run into serious financial trouble.

But the bill faces an uncertain future in the Senate, where Democrats friendly to the housing behemoths may block it. And the White House is another potential obstacle, favoring limits on the size of Fannie and Freddie''s mortgage portfolios.

The Mortgage Bankers Association hailed the passage of the bill by the House committee, saying the new regulator will now have authority to set a clear definition of the secondary mortgage market.

Similarly, the American Bankers Association welcomed the bill but appeared to hold out hope the final version will keep Fannie out of the primary mortgage market.

"The ABA will continue to work with members of Congress to ensure that the new regulator has the guidance and tools necessary so that Fannie Mae and Freddie Mac remain efficient secondary market providers of credit and do not enter the primary market," said ABA Congressional Relations Director Floyd Stoner.

One analyst put the odds of enacting reform for the government-sponsored enterprises at below 50%.

"The political will in Congress to defy the [Realtors], home builders and smaller banks by sharply curtailing Fannie Mae and Freddie Mac mortgage portfolios is not there," Stanford Washington Research Group financial services analyst Jaret Seiberg wrote Monday.

Fannie and Freddie are congressionally chartered but stockholder-owned firms that buy mortgages and repackage them into securities. The companies hold a combined $1.5 trillion in mortgages, a figure that has raised alarm from both the Bush administration and Federal Reserve Chairman Alan Greenspan.

Both Fannie and Freddie have weathered accounting scandals and replaced top management. Fannie, the second-largest U.S. financial institution after Citigroup C is facing a restatement of up to $11 billion stemming from regulators'' findings it manipulated earnings.