Battle lines are being drawn in New York’s real estate market, pitting Freddie Mac and Fannie Mae against subprime lenders in New York.

Last week, New York Governor David A. Patterson signed into law a subprime lending reform bill (S.8143-A/A.10817-A), creating stringent lending guidelines for subprime lenders. Under the new law, investors, including loan buyers like Freddie Mac and Fannie Mae, are held liable for mortgage fraud. It also lays out requirements for brokers to act in borrowers’ best interests, and mandates all local mortgage servicers to register with the state’s banking department.

Moreover, the new bill classifies mortgage fraud as a crime under the state’s penal code, making it easier for prosecutors to pursue criminal cases and convictions.

Meanwhile, Fannie Mae — the beleaguered government-sponsored enterprise (GSE) holding billions in bad loans — reported this week that it will stop purchasing mortgage loans in New York that fall within the state’s definition of “subprime home loans.”

Fannie’s sibling, Freddie Mac, who is also reeling with bad debt, chimed in last week, saying it will pull out of the New York subprime market on September 1, 2008.

Both are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost Americans billions of dollars.

Columnist Peter Miller explains why these are serious developments for the New York real estate market.

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