Nov. 7 (Bloomberg) -- New York Attorney General Andrew Cuomo is expanding his investigation of the mortgage industry to include Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing. Fannie Mae and Freddie Mac shares fell.

Cuomo said in an e-mail today that he plans a news conference in New York City for 12 p.m. Last week, Cuomo sued the real estate appraisal unit of First American Corp., the biggest U.S. title insurer. Cuomo accused the appraiser of inflating home values under pressure from Washington Mutual Inc. The eAppraiseIT LLC unit gave in to demands for higher appraisals to secure more of Washington Mutual's business, Cuomo said.

Cuomo will announce ``a significant new development in his expanding investigation into the mortgage industry involving Fannie Mae and Freddie Mac,'' the statement said.

States including California, Colorado, Ohio, and Connecticut have been investigating the mortgage industry as foreclosures rise nationwide. A borrower who gets a home loan based on an inflated appraisal and falls behind on payments would have difficulty selling or refinancing for enough to pay off the mortgage.

Fannie Mae spokesman Brian Faith and Freddie Mac spokesman Douglas Duvall declined to immediately comment.

Corinne Russell, spokeswoman for the Office of Federal Housing Enterprise Oversight, declined to comment. The agency is the federal regulator in Washington for Fannie Mae and Freddie Mac.

Fannie Mae fell 3.7 percent to $53.34 in New York Stock Exchange composite trading at 9:41 a.m. Freddie Mac fell 3.4 percent to $47.70.

Nine-Month Investigation

Cuomo conducted a nine-month investigation and said last week the evidence against First American is ``damning.'' It includes e- mails between executives at the appraisal company and Washington Mutual that show eAppraiseIT ``willingly violated'' state and federal regulations that call for independent home appraisals.

The appraiser did 262,000 valuations over the past 18 months for Washington Mutual, the biggest U.S. thrift, and earned $50 million, Cuomo said.

In March, Cuomo, 49, said he was investigating the subprime mortgage market in response to the surge in mortgage delinquencies. In May, he subpoenaed real estate appraisers Mitchell, Maxwell & Jackson Inc. and eAppraiseIT, as well as the broker Manhattan Mortgage Co.

Within a month, Cuomo subpoenaed records from Vanderbilt Appraisal Co. LLC, which is owned by Terra Holdings, a real estate company whose principals include New York developers Arthur and William Lie Zeckendorf.

In September, credit rating companies Standard & Poor's and Fitch Ratings said they were subpoenaed by Cuomo. Fitch said its subpoena demanded information on residential mortgage-backed securities and collateralized-debt obligations, which hold mortgage-backed securities.

To contact the reporter on this story: Alan Mirabella in New York at amirabella@bloomberg.net .