(Update 3: added Freddie Mac; OFHEO comments; Cuomo comments) A landmark agreement by Fannie Mae and Freddie Mac with New York Attorney General Andrew Cuomo will force some big changes to the way appraisals are processed in the mortgage industry. The agreement, which hit a snag last week, was finalized Monday morning and will eliminate broker-ordered appraisals and reduce the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages. “With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,” said Cuomo. “Now national banks have a clear choice: immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac – it is that simple.” As part of the deal, Cuomo's office will terminate its inquiry into both Fannie and Freddie. The GSEs had been subpoenaed in November 2007 as part of an ongoing complaint by Cuomo's office against appraisal practices at the First American Corporation. "We are pleased to work with regulators to do our part to ensure sound, accurate, independent and reliable appraisals," Fannie Mae general counsel Beth Wilkinson said, who said the agreement was key to "a well functioning market." Both GSEs said they will adopt a new set of appraisal regulations, called the Home Valuation Protection Code, that establish requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence. "Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market," said OFHEO director James Lockhart. "These agreements build upon existing federal and state laws and regulations to further strengthen the single-family home appraisal process." Fannie and Freddie will adopt the new code immediately, and make appropriate changes to their Sellers Guides to reflect the code. Beginning January 1, 2009, both will require that lenders represent and warrant that appraisals prepared in connection with mortgage loans originated on or after that date conform to the code. Both GSEs will also fund the creation of an Independent Valuation Protection Institute. The Institute will monitor and study the area of home valuations, and will establish a hotline for consumers to contact if they believe the appraisal process has been tainted or if they believe they have been harmed by appraisal fraud. Appraisers also will be able to contact the Institute if they believe their independence has been threatened in any way. "Our lender guide has always stated that lenders must buy back the loans that do not meet our standards and requirements, and the new Code reinforces our standards," Wilkinson said. "We will continue to work with the New York State Attorney General and other regulators to support the highest lending standards for the market and homebuyers." The news is likely to be cheered by many, but one group of businesses is now facing extinction: the large appraisal shops that brokered out orders to their own network of appraisers. "There are some large appraisal brokerages that just went out of business," said one source, who asked that her name not be used. “Today’s agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry – rampant appraisal fraud,” said Cuomo. “The integrity of our mortgage system depends on independent appraisals. "Again and again our industry-wide investigation found that banks were putting pressure on appraisers to drive up the value of loans just to make a quick buck. We believe the new standards, and the new independent monitor agreed to today, can begin to erase this problem from the industry."