Updated from 1:50 p.m.

Washington Mutual

(WM) - Get Report

shares plunged anew after New York Attorney General Andrew Cuomo said he was expanding his probe of allegedly inflated house-price appraisals.

Cuomo said he subpoenaed the two big government-sponsored mortgage investors,

Fannie Mae

( FNM) and

Freddie Mac

( FRE), over mortgages they have bought from Washington Mutual. Cuomo said Fannie and Freddie agreed to appoint an independent examiner to probe their dealings with WaMu, with an eye toward the appraisal process.

Calls to Wamu were not immediately returned, but Fannie Mae and Freddie said they were cooperating with Cuomo's office. Fannie said that if allegations about appraisal fraud are true, it would "violate Fannie Mae's requirements for loans we purchase from lenders or securitize."

The probe and Fannie's comments raise the prospect that WaMu could face problems selling mortgages to the government-sponsored mortgage companies. Any decline in sales to Fannie and Freddie could seriously damage WaMu's business, given that other investors basically stopped buying mortgages after the collapse of the subprime mortgage-backed securities market this past summer.

WaMu shares more than doubled their losses on word of Cuomo's latest move. The stock was down 7% earlier Wednesday after the Seattle-based lender told investors to expect rising losses next year on bad mortgages.

Observers say that the potential implications on Wamu if Fannie Mae or Freddie Mac cease purchasing loans from Wamu could be significant.

"In this environment if you can't package products and sell to Fannie or Freddie, right now there is no real other alternative at this point," says Mark Batty, a financial services analyst at PNC Capital Advisors, which manages $77 billion in assets. "If they're not Fannie or Freddie quality mortgages, you have to keep them on their books. Asset growth would become incredibly difficult for them if there is an issue with Fannie or Freddie going forward."

And while WaMu's strong retail deposit base can at least provide somewhat of a cushion for the bank, "deposit growth is minimal -- it's a few percent a year," Batty says. "It would limit your profitability and certainly your ability to grow your assets and therefore grow revenues and earnings if there is something that precludes Fannie or Freddie from dealing with them going forward."

Of the three portfolios that the

PNC

(PNC) - Get Report

subsidiary manages, none hold shares of Wamu, Batty says.

WaMu shares tanked last week after Cuomo sued a unit of title insurer First American, alleging the firm's eAppraiseIt subsidiary had conspired to inflate house-price appraisals in an effort to boost fees.

A suit filed last Thursday in New York State Supreme Court by Cuomo's office says First American "caved to pressure" from WaMu to use a list of appraisers who inflated the values of thousands of homes. Cuomo's suit alleged that executives at eAppraiseIT "knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu."

WaMu suspended its business with the First American unit and said it would investigate, while claiming it has "absolutely no incentive to have appraisers inflate home values." First American said at the time of the suit's filing that the attorney general's claims "belie our record of compliance with applicable law."

On Wednesday, WaMu slid $4.24 to $19.99, a 52-week low. First American fell $1.82 to $30.25.