By MARCY GORDON
Associated Press

WASHINGTON - The federal regulator who oversees Fannie Mae and Freddie Mac on Nov. 8 accused New York's attorney general of overstating risks the mortgage finance companies face from faulty home appraisals.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, sent a strongly worded letter to New York Attorney General Andrew Cuomo a day after he issued subpoenas to government-sponsored Fannie and Freddie as part of a widening investigation of inflated appraisals.

In response, Cuomo insisted through a spokesman that his investigation has uncovered clear evidence of pressure on home appraisers to inflate their assessments and that many of the tainted mortgages were purchased by Fannie and Freddie.

While respecting the jurisdiction of Lockhart's agency, "our office has a legal duty and unquestioned jurisdiction to protect New York consumers and investors," the spokeman, Jeffrey Lerner, said in an e-mailed statement. "Our investigation will continue to root out fraud in the industry."

Cuomo said Nov. 7 that he wants to know about billions of dollars of home loans that Fannie and Freddie bought from banks, including the largest U.S. savings and loan, Washington Mutual Inc. The subpoenas also seek to find out how Fannie and Freddie, the two largest buyers and financiers of mortgages, handle appraisals to determine whether lower income home buyers were stuck with mortgages based on inflated appraised values.

The two companies agreed to Cuomo's request to appoint independent examiners to study the possible effects of faulty appraisals on the mortgages they purchased, especially from Seattle-based Washington Mutual.

Lockhart objected to what he characterized as Cuomo's demand that Fannie and Freddie "cease doing business with a major federally chartered bank, which you have not charged or subpoenaed, unless certain conditions stipulated by you are met."

Cuomo said Wednesday that Fannie and Freddie "cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals."

Lockhart, who has often criticized Fannie and Freddie as they have recovered from multibillion-dollar accounting scandals in recent years, said Fannie and Freddie don't have an incentive to knowingly buy mortgages with puffed-up appraisals. Unlike other companies that issue mortgage-backed securities, they retain the credit risk on the underlying mortgages by guaranteeing repayment to holders of the securities.

Both companies' operating rules require that if they have bought or backed mortgages deemed to be linked to inflated appraisals, the lender must buy them back.

Lockhart told Cuomo he was "disappointed that your office did not contact OFHEO before or even after subpoenaing (Fannie and Freddie) and issuing certain threats regarding their future business actvitiy."

Lockhart, who is a Bush appointee, told Cuomo, a Democrat, that he also wanted to discuss the scope and authority of the independent examiners who will scrutinize the two companies' mortgage business.

Lerner said in the statement, "We would be pleased and look forward to meeting with OFHEO at any time."

Michael Cosgrove, a spokesman for McLean, Va.-based Freddie, and spokesman Brian Faith at Washington-based Fannie declined to comment on Lockhart's letter.

Both companies have confirmed that they are continuing to purchase mortgages from Washington Mutual in accordance with their existing contracts, the bank said last week. Washington Mutual is the third-largest provider of home loans to Freddie, selling it $24.7 billion this year alone. It sold Fannie $7.8 billion in mortgages this year.