Nucleic acid cytidine deaminases of the activation-induced deaminase (AID)/APOBEC family are critical players in active and innate immune responses, playing roles as target-directed, purposeful mutators. AID specifically deaminates the host immunoglobulin (Ig) locus to evolve antibody specificity, whereas its close relative, APOBEC3G (A3G), lethally mutates the genomes of retroviral pathogens such as HIV. Understanding the basis for the target-specific action of these enzymes is essential, as mistargeting poses significant risks, potentially promoting oncogenesis (AID) or fostering drug resistance (A3G). AID prefers to deaminate cytosine in WRC (W = A/T, R = A/G) motifs, whereas A3G favors deamination of CCC motifs. This specificity is largely dictated by a single, divergent protein loop in the enzyme family that recognizes the DNA sequence. Through grafting of this substrate-recognition loop, we have created enzyme variants of A3G and AID with altered local targeting to directly evaluate the role of sequence specificity on immune function. We find that grafted loops placed in the A3G scaffold all produced efficient restriction of HIV but that foreign loops in the AID scaffold compromised hypermutation and class switch recombination. Local targeting, therefore, appears alterable for innate defense against retroviruses by A3G but important for adaptive antibody maturation catalyzed by AID. Notably, AID targeting within the Ig locus is proportionally correlated to its in vitro ability to target WRC sequences rather than non-WRC sequences. Although other mechanisms may also contribute, our results suggest that local sequence targeting by AID/APOBEC3 enzymes represents an elegant example of co-evolution of enzyme specificity with its target DNA sequence.