The debate over whether to exempt certain mortgages from “risk-retention” rules in the financial-regulatory overhaul bill could become a case-study in the unintended consequences of lawmaking. (Read “Mortgage Players Look to Soften Bill“)

Both the House and Senate bills included risk-retention provisions that require mortgage originators to retain 5% of any loans that are bundled together and sold off in pieces to investors. If lenders, the thinking goes, had been forced to own a piece of the no-money-down, we-won’t-verify-your-income loans that they made during the housing boom, they might have been more careful.

The mortgage industry hates this provision because it would require them to hold more capital and they say that it would raise the cost of making mortgages. Small banks say the higher-capital requirements would make it harder for them to sell loans into the secondary market.

The Senate wants an industry-backed provision that would exempt from the risk-retention rules a broad group of “qualified” mortgages that conform to certain standards, such as those that are fully documented and fully amortizing loans. But Rep. Barney Frank, concerned that such a provision is too generous, proposed this week a measure that would exempt only loans from government agencies such as the Federal Housing Administration. Regulators would be free to later exempt other specific loans.

The trouble is that such a fix could cause new headaches. By giving the FHA an exemption to risk-retention rules, the government risks cementing the FHA’s already huge role in the mortgage market at a time when federal housing officials say they want to wean the market off government life support. The agency accounts for 25% of all mortgages today, up from 2% during the subprime heyday, when its lending standards were viewed as too strict.

The irony is particularly rich because Congress, which wants risk-retention rules in order to encourage prudent underwriting, might exempt the FHA, which today has the easiest loan terms today by offering minimum 3.5% down payments. If private lenders were required to hold any of the risk on those loans, they would probably not make as many of them.

Congress may feel pressure to exempt government-guaranteed loans because the current legislation is unclear about whether investors might now have to retain the risk in those loans, potentially altering the 100% government guarantee. Those loans are bundled and sold to investors as Ginnie Mae securities, which carry the full faith and credit of the U.S. If the risk-retention rules were to somehow alter that 100% government guarantee, the securities could lose some luster.

The Senate version, meanwhile, would exempt more loans under its standards for so-called “qualified” mortgages. Loans that had less than 20% equity, for example, could be considered safe as long as they had mortgage insurance.

Of course, many of those loans have not performed well during the housing bust. While Freddie Mac reported that 4.08% of its loans were 90 days or more past due in April, that delinquency rate was more than double, at 8.68%, for loans that had mortgage insurance and other “credit enhancement.”