WASHINGTON (Reuters) - The two largest sources of U.S. mortgage financing agreed on Monday to sponsor a new home appraisal watchdog to prevent inflated home values.

Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) will uphold a new code of conduct meant to keep mortgage lenders at arm's length from home appraisers and will also spend $24 million to jump-start the new oversight body in a deal to prevent lawsuits from New York Attorney General Andrew Cuomo.


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Starting January 1, 2009, the government-sponsored enterprises will buy home loans only from lenders that endorse an appraiser code of conduct that Cuomo said he hopes will become an industry standard.

"This is one of the greatest, most dramatic reforms of the housing industry in the last 20 years," Cuomo said at a press event in New York announcing the deal. "We believe as a group that this will be a significant and dramatically positive reform."

Since Wall Street gladly bought and bundled home loans for investors during the housing boom, lenders may have felt more comfortable inflating loan amounts. Cuomo filed subpoenas against Fannie Mae and Freddie Mac to determine whether the companies stood by as that happened.

The new code will prohibit mortgage brokers from selecting a home appraiser, while lenders may not use in-house assessors for initial reports on the value of homes. In another provision of the settlement, Fannie Mae and Freddie Mac will each provide $12 million over the five years to help establish an appraisal oversight body.

The companies' federal regulator, the Office of Federal Housing Enterprise Oversight, will host the new watchdog group, which will maintain a consumer hotline and promote appraiser independence.

The new standards will help break long-standing business practices under which lenders often had close ties to home appraisers, said David Berenbaum, an executive with the National Community Reinvestment Coalition.

"Many lenders have had business interests in appraisers," he said. "Unless you have independent appraisers, you are losing consumer protections."

Sheila Bair, chair of the Federal Deposit Insurance Corp., said she welcomes the move and that the mortgage industry will have an open window of time to comment on the proposal before it is implemented.

In a joint letter to Cuomo, several appraisal trade groups wrote that they would use the comment period to "provide input to you on the development and completion of your plan."

But one regulator expressed disappointment that the accord with Fannie Mae and Freddie Mac did not have broader input.
"We are concerned that the closed-door fashion in which (the deal) was reached could result in negative unintended consequences," the Office of Thrift Supervision said in a statement. "The proposal should be discussed among the bank regulatory agencies and go out for public comment before being adopted."

(Reporting by Patrick Rucker in Washington and Joseph Giannone in New York; editing by Dan Grebler)

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