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NY court allows Cuomo suit over bogus home appraisals

* Lawsuit alleged First American independence compromised

* NY state appellate court says Cuomo can invoke state law

NEW YORK, June 8 (Reuters) - New York can proceed with a lawsuit accusing title insurer First American Corp of colluding with Washington Mutual Inc WAMUQ.PK to fraudulently inflate home values, a state appeals court unanimously ruled on Tuesday.

Attorney General Andrew Cuomo had accused First American and its eAppraiseIT unit in a November 2007 lawsuit of having “caved” to pressure from Washington Mutual to use a list of pre-approved appraisers who provided inflated appraisals, in an effort to win more business.

First American defended itself against the lawsuit, among the earliest by a U.S. regulator over the nation’s housing crisis, arguing that federal law barred New York from suing under its own laws.

But a four-justice panel of the New York State Appellate Division, which sits in Manhattan, rejected the Santa Ana, California-based company’s argument.

“Enjoining a real estate appraisal management company from abdicating its publicly advertised role of providing unbiased valuations” is not covered under federal law, Justice Luis Gonzalez wrote for the court.

He said Cuomo may instead rely on state law to try to recover for “misrepresentations and other deceptive conduct allegedly perpetrated on the consuming public.”

Washington Mutual was not a defendant in the case.

Lenders that use inflated appraisals can sometimes extend larger home loans, and as a result collect higher fees. The practice can also result in borrowers taking out larger loans than they can afford.

Cuomo had argued that First American’s lack of independence was among the factors that caused the housing crisis. He sought to end the alleged improper practices, recover ill-gotten profits, restitution and other remedies.

First American on June 1 said it has split into two companies: First American Financial Corp FAF.N and CoreLogic Inc CLGX.N. The eAppraiseIT unit is now part of CoreLogic, according to that Santa Ana-based company's website.

An eAppraiseIT spokesman said: “We are disappointed and disagree with the court’s decision, and are considering our options on appeal.”

Regulators seized Seattle-based Washington Mutual in September 2008 after it had amassed about $176 billion of home equity, adjustable-rate and subprime home loans on its books.

Washington Mutual remains by far the largest bank or thrift to fail in U.S. history. JPMorgan Chase & Co JPM.N acquired its banking operations, while the Washington Mutual holding company filed for bankruptcy protection.

Cuomo, a Democrat, is the front-runner in the New York’s 2010 gubernatorial race.

The case is Cuomo v. First American Corp et al, New York State Supreme Court, Appellate Division, First Department, No. 1308.

Reporting by Jonathan Stempel; Additional reporting by Paritosh Bansal; Editing by Phil Berlowitz