New York Attorney General Andrew Cuomo may face legal challenges to his effort to overhaul the way homes are appraised across the U.S. Such a case could help clarify how far state officials can go in setting public policy for the nation as a whole.

Earlier this year, Mr. Cuomo made an end run around federal regulators and Congress with a campaign against inflated home appraisals, which have contributed to the current wave of mortgage defaults. He threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to ensure that appraisers were shielded from pressure to pad their estimates. Appraisers have long maintained that many loan officers or brokers, whose pay depends on how many loans they complete, pressure them to come up with value estimates high enough to ensure approval of the loans.

In March, Fannie and Freddie, eager to avoid a legal battle, agreed with Mr. Cuomo on an appraisal code of conduct, which is due to take effect Jan. 1.

The plan has drawn fire from mortgage-industry groups and some federal regulators. Among other things, they say the code could raise costs for consumers and cause unnecessary disruption in the appraisal business.

Mr. Cuomo's staff describes the code as an agreement between his office and the mortgage companies, backed by their main regulator, the Office of Federal Housing Enterprise Oversight. But Fannie and Freddie buy or guarantee the bulk of all U.S. home loans. So nearly all lenders would be bound by the code, making it a de facto national standard. Many people in the appraisal and mortgage industries are upset that Mr. Cuomo was able to rewrite the rules without giving Congress or federal banking regulators time to weigh in.

Unless Mr. Cuomo works with the industry to revise the code, "somebody out there is likely to file litigation," says Steve O'Connor, a senior vice president at the Mortgage Bankers Association. Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, says legal action against the planned code is "one option" his trade group will consider.

The mortgage brokers and others argue that the code of conduct is tantamount to federal regulation and so is subject to the U.S. Administrative Procedures Act. The act requires federal agencies seeking to make new rules to first publish a proposal and solicit public comments on it, says Raymond Natter, a lawyer at the Washington firm of Barnett Sivon & Natter.

After the comment period, the agency must explain its reasons for adopting the rules. It also must discuss how the proposal will affect small business and steps taken to minimize the regulatory burden, Mr. Natter says.

In an interview, Mr. Cuomo said he was "totally confident in the legal process used." Both he and Ofheo's director, James Lockhart, promised to consider suggestions for changes in the code.

The code would prohibit lenders and their representatives from prodding appraisers to inflate their estimates. Brokers or bank employees involved in making loans wouldn't be able to choose appraisers, and lenders couldn't make loans on the basis of appraisals from their employees or companies they control.

The Office of Thrift Supervision, which regulates savings-and-loan companies, said last week that requiring lenders to outsource appraisals "will not ensure appraiser independence and may make regulatory enforcement more difficult."

Write to James R. Hagerty at bob.hagerty@wsj.com

Fannie Aims to Head Off Foreclosures

Treasury Pressures Mortgage Firms