If you live in the United States, chances are you probably have a relationship with a GSE, government-sponsored enterprise. A GSE is sort of a government agency. Meaning that it is a privately held agency established by Congress. Whenever you try to understand how these entities work, the jargon can be difficult to understand. Making something simple seem overly complicated. In this post, we hope to simplify what a government-sponsored enterprise is and how they work.
What Does GSE Stand For?
“GSE stands for government-sponsored enterprise. A GSE provides financial services to the public for various things, particularly mortgages, through capital market liquidity. Now, to give it to you in plain English, a government-sponsored enterprise is a company that’s supported by the government but run privately to help improve specific areas of the U.S. economy. They do this by guaranteeing to purchase a specific type and number of loans and then selling them as mortgage-backed securities to investors in the secondary market to boost capital flow in the real estate market. Think of it like this: if a lender only had enough money to fund 30 mortgages at $100,000 that all had a 30-year term, they would have to wait 30 years before they could offer additional $100,000 mortgages. To avoid this issue, a GSE purchases loans from third-party lenders, therefore giving them more cash flow to lend.”
How Do GSE Mortgage Loans Work?
“GSEs like Fannie Mae and Freddie Mac don’t actually issue you a mortgage loan directly. Instead, they provide third-party loans and purchasing guarantees in the secondary market, which provides lenders with more flexibility and money to lend. It also makes it easier for the borrower to get approved because loans that are guaranteed by Fannie Mae and Freddie Mac usually have a lower down payment requirement, a lower credit score requirement and better interest rates. GSEs, therefore, increase the number of homes purchased and increase money flowing in the real estate industry.” This post’s main focus is on mortgage GSEs, but they also assist other industries as well like student loans through the U.S. Department of Education.
List Of Government-Sponsored Enterprises
- Federal Home Loan Banks. Founded in 1932 and made up of various banks and lenders, the Federal Home Loan Banks were the first mortgage-based GSEs. The Federal Home Loan Banks system is the only GSE that can directly issue mortgages.
- Federal National Mortgage Association (FNMA or Fannie Mae). This GSE was founded in 1938 and provides mortgage funding by buying them from large commercial banks to sell to investors.
- Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). This GSE was founded in 1970 and is similar to Fannie Mae, except that it purchases mortgages from smaller banks and lenders.
- Farm Credit System. The first GSE, created in 1916, provided credit for farmers and ranchers to support the country’s agriculture. It is made up of a network of cooperating lenders and associations.
- Federal Agricultural Mortgage Corporation (FAMC or Farmer Mac). This GSE was established by Congress in 1987 and guarantees repayment to agricultural investors.
GSEs help make home ownership possible. Without them in the mortgage space, it would be really hard to buy a home, especially if you had a low income or a low credit score. Because of GSEs and mortgage investors, the U.S. economy has a mortgage market that has access to liquidity and stability at all times.