The nation's two largest sources of mortgage funds have agreed to sponsor a new home appraisal watchdog group to prevent inflated home values, Reuters reported Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will provide $12 million each over the next five years to create the new independent organization to monitor the new appraisal standards.

Seeking to avoid multiple lawsuits by New York Attorney General Andrew Cuomo, the two also agreed to a code of conduct to take effect January 1, 2009, The Wall Street Journal reported Tuesday (subscription required). Further, as the largest purchasers of mortgages, the code will become the effective new standard for the U.S. mortgage industry.

The new code bars lenders from using appraisals ordered by mortgage brokers, and also bars them from pressuring appraisers to supply inflated estimates of property values, which many believe were a major factor in the mortgage crisis.

Both the SEC and New York State Attorney General Andrew Cuomo are investigating possible appraisal problems at Washington Mutual (NYSE: WM), according to today's Wall Street Journal. The SEC is just starting its inquiry into whether investors of mortgage-backed securities were informed about how the mortgage lender arranged for home appraisals. WaMu said it's fully cooperating with the SEC and the Office of Thrift Supervision, which is WaMu's federal regulator.

Cuomo filed a lawsuit in November without naming the bank as a defendant, but alleged it "exerted pressure on an appraisal company to inflate property valuations to ensure its loans went through," according to the Journal story. Cuomo believes that WaMu hand-picked appraisers that brought in high valuations and that bank employees and pressured at least one appraisal company to increase estimates that came in too low. First American, which is named in the suit, asked that the case be thrown out of court because Cuomo doesn't have jurisdiction. It believes only the Office of Thrift Supervision can take action.

WaMu told the Journal, "After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals. We take these allegations seriously."