UPDATE 1-U.S. mortgage sector sees harmful mandate

(Adds comment from NY AG Cuomo's office)

By Patrick Rucker

WASHINGTON, April 30 (Reuters) - A mandate to split the U.S. home loan and home appraisal industries would needlessly damage those sectors and endanger the two largest U.S. sources of mortgage finance, appraisal and lending trade groups said on Wednesday.

The plan in question calls for Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) only to finance home loans from lenders that have put their appraisers at arm's length.

The mortgage finance giants agreed to those rules as part of a March deal with New York Attorney General Andrew Cuomo to end an investigation into whether the government-sponsored enterprises (GSEs) had allowed inflated home valuations.

On Wednesday, the Mortgage Bankers Association (MBA) and a confederation of appraisal groups outlined their opposition to a plan they called burdensome and wrongheaded.

The deal "could eliminate many of the strongest protectors of the (mortgage underwriting) process: namely, competent, unbiased real estate appraisers," reads a letter signed by the Appraisal Institute and three other home valuation groups.

In its own letter, the MBA said the plan could "present safety and soundness risks to the GSEs and financial institutions generally."

The letters were directed to Fannie Mae and Freddie Mac, and their federal regulator, the Office of Federal Housing Enterprise Oversight.