What Is A Government-Sponsored Enterprise (GSE), And How Do GSE Loans Work?

While the term “government-sponsored enterprise” may sound intimidating, you’re likely already very familiar with many of them. Fannie Mae and Freddie Mac, for instance, 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 obtaining a mortgage and becoming a homeowner 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, they do 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, sold as mortgage bonds, 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 income than would typically be required or are seeking financial assistance through first-time home buyer programs.

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

Let’s take a look at some of the most commonly known mortgage government-sponsored enterprises: Federal Home Loan Banks, Fannie Mae, Freddie Mac and Farmer Mac.

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.

Fannie Mae

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.

When a GSE buys a mortgage from a lender, they get their money back by turning around and selling it as part of a mortgage-backed security to mortgage investors.

Freddie Mac

Federal Home Loan Mortgage Corporation (Freddie Mac) was founded in 1970. Freddie Mac differs from cousin Fannie Mae, because it focuses on buying mortgages from smaller banks and lenders.

Farmer Mac

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

Here are some less commonly known government-sponsored enterprises:

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 made up of FHA, USDA and VA loans 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 lender will. It’s important to keep track of the activity of government-sponsored enterprises; their health and wellbeing is crucial to a healthy housing market and thriving economy. To recap, here is what’s most important to know about government-sponsored enterprises:

Ready to explore homeownership? The first necessary step will be getting preapproval, which can give you an idea of how much house you can afford. today.