While the term “government-sponsored enterprise” sounds intimidating, you are likely already very familiar with many of them. Fannie Mae and Freddie Mac are household names – did you know they fall under this category?
Government-sponsored enterprises (GSEs) exist to help the American consumer, which is why it's important to be familiar with them and what they can offer – especially if you’re considering homeownership in the near future.
What Is A Government-Sponsored Enterprise (GSE)?
GSEs are privately held financial entities created by Congress for the purpose of raising credit in certain areas of the U.S. economy, particularly in real estate. GSEs provide public financial services with the intention of reducing mortgage costs for home buyers.
A government-sponsored enterprise is very different from a government agency. The main difference is in how the organization is structured and run. Agencies are run directly by the federal government, while GSEs are privately held organizations. While they are privately held, obviously they receive financial benefits from being sponsored by the U.S. government.
As such, GSEs also do a big service to the economy by enhancing the flow of credit. GSEs buy mortgages from lenders, thus increasing the lenders’ liquidity.
How Do GSE Mortgage Loans Work?
A GSE cannot underwrite loans, only banks can do that. Instead, a GSE can guarantee a third-party loan, such as indirect or installment loans, to borrowers, rather than issue them directly. By having that third-party guarantee the loan, banks can then lend money to home buyers who seek a mortgage, but may have lower credit or lower income than would typically be required.
Also, because GSE mortgage loans have the power of the federal government behind them, many GSE mortgages come with lower interest rates as well.
Common Mortgage Government-Sponsored Enterprises
Federal Home Loan Banks
The Federal Home Loan Banks (FHLB) system was established by the government in 1932 to help stimulate the housing market and provide liquidity in the capital markets.
The Federal National Mortgage Association (Fannie Mae) was founded in 1938 and buys mortgages from large commercial banks. With the money they spent on that loan back, lenders then turn around and write more loans, and so the economy keeps moving.
Federal Home Loan Mortgage Corporation (Freddie Mac) was founded in 1970. Freddie Mac differs from cousin Fannie Mae, because it almost exclusively focuses on buying mortgages from smaller banks and lenders.
In 1988, Congress created the Federal Agricultural Mortgage Association. The job of Farmer Mac is to guarantee the repayment of principal and interest to agricultural bond investors. By guaranteeing payment to these investors, Farmer Mac helps stabilize the agricultural lending market.
Other Government-Sponsored Enterprises
- Federal Farm Credit System Corporation: As the very first GSE, the Federal Farm Credit System was created in 1916 to assist farmers and those in the agricultural business access credit.
- Sallie Mae: A former government-sponsored enterprise, Sallie Mae dropped its GSE status in 2004.
- National Veteran Business Development
What About Ginnie Mae?
While Ginnie Mae is often lumped in with cousins Fannie and Freddie, the Government National Mortgage Association is actually a government agency, not a government-sponsored enterprise.
As a government agency, the primary purpose of Ginnie Mae is to guarantee payment of principal and interest on mortgage-backed securities to keep market costs low for first-time home buyers and low-income borrowers.
The Bottom Line
As a consumer, you’ll likely never interact with a GSE, but your bank will. It’s important to keep track of the activity of government-sponsored enterprises; their health and well-being is crucial to a healthy housing market and thriving economy. To recap, here is what’s most important to know about government-sponsored enterprises.
- GSEs were created by Congress to help stabilize certain markets and sectors of the American economy (agriculture and real estate, for example).
- GSEs do not loan money, rather they guarantee certain loan products geared toward low- to middle-income borrowers.
- By guaranteeing they’ll buy loans from financial institutions, banks are able to give credit to consumers who otherwise would not qualify. They also help banks free up capital to turn around and write more mortgage loans.
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