ALBANY - A deal struck between New York's attorney general and government-sponsored lenders Fannie Mae and Freddie Mac will not clean up the nation's subprime mortgage mess, but its backers say it is a big step toward fixing one of the causes of the crisis.

The agreement, announced Monday by New York Attorney General Andrew Cuomo, prohibits the lenders from using in-house staff for initial appraisals and from using appraisal management companies that they own or control.

Cuomo said appraisers who work for lenders face a conflict of interest when evaluating the value of homes that their companies could profit from.

As a result, the listed value of homes has increased, contributing to a national mortgage crisis that is forcing families into foreclosure, said Cuomo, who ran President Clinton's Department of Housing and Urban Development.

“We believe the appraisals were often fraudulent because of a conflict of interest and pressure on the appraisers,” Cuomo said. “To us, this issue was a pervasive issue that needed to be solved.”

Fannie Mae and Freddie Mac purchase nearly 80 percent of all home loans originated in the U.S., Cuomo said in a phone interview.

“It's going to create massive change,” said Brian Chappelle, a partner at Potomac Partners in Washington, D.C., a consulting firm to the mortgage industry.

He said mortgage lenders that own appraisal companies - such as Wells Fargo & Co. and Countrywide Financial Corp. - may have to spin off those divisions because they would be prohibited from selling mortgages to Fannie and Freddie unless the appraisal work was being done independently.

But not everyone was happy with the deal. The trade group representing mortgage brokers, which often designate specific appraisers under the current system, protested the agreement and threatened legal action.

The agreement “will increase costs to consumers by removing thousands of small-business competitors from the marketplace,” Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said in a statement.

Cuomo said his goal was to identify the source of the problem and then solve it, rather than punishing the mortgage industry for where it has wound up.

“I believe consumer confidence should be restored,” Cuomo said. “With these reforms we will have a safer, better evaluation process.”

The core of the problem is securities backed by subprime mortgages. They have gone into default at record rates because of the housing market's slump. The loans were extended to borrowers with weak credit histories.

Fannie and Freddie will require lenders to conform to the code beginning in 2009.

The companies will also pay $24 million to create an institute that will monitor the code to make sure it's applied appropriately. The companies did not admit wrongdoing, and the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, was on board with Cuomo's plan.

Consumers nationwide will have access to a complaint hot line if they suspect their appraisal is fraudulent or if they were a victim of fraud. Appraisers will be able to reach out to the institute if they feel they are pressured to commit fraud, or if their independence is compromised.

The institute will report back to the attorney general and the OFHEO every six months.

Cuomo has been investigating billions of dollars of home loans that Fannie and Freddie bought from banks, including the largest U.S. savings and loan, Washington Mutual Inc.

“These improvements will help to ensure that appraisals serve as an independent evaluation of a property's value for the buyer, the seller, the lender, and the investor,” said U.S. Rep. Paul Kanjorski, the chairman of the House Financial Services Committee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Kanjorski, a Democrat from Pennsylvania, said he and Federal Reserve Board Chairman Ben Bernanke have called on the Federal Reserve and other banking regulators to support Cuomo's appraisal agreement.