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What Is A Government-Sponsored Enterprise (GSE)?

Sa El3 minute read

April 06, 2022


Believe it or not, if you live in the U.S., you probably already have some sort of relationship with a government-sponsored enterprise (GSE).

However, when you try to understand better how they work, the jargon can confuse you and make something simple seem very complicated.

In this post, we’ll give you the answers in plain English as to what a government-sponsored enterprise is and how it works.

What Does GSE Stand For?

A government-sponsored enterprise (GSE) is a quasi-governmental, privately held agency established by Congress to improve credit flow in some regions of the United States' economy.

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.

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GSEs In The Mortgage Industry

In 1932, the Federal Home Loan Bank (FHLB) system was created by Congress as a GSE for the mortgage industry with the primary purpose of stimulating the housing market.

The most notable GSEs in the mortgage industry today are Fannie Mae and Freddie Mac.

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 mortgage 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.

GSE Bonds Vs. Treasury Bonds

When it comes to the mortgage bond market, both private companies and the U.S. Treasury can issue bonds; however, there are some differences.

One of the significant differences between a GSE bond and a Treasury bond is that GSEs are not backed by the full faith and credit of the U.S. government, while U.S. Treasury bonds are.

Full faith and credit means that the government has pledged to pay interest and principal back to the investor when the bond matures.

GSE bonds will have both credit risk and default risk, and the yield on these bonds is usually a bit higher than with a U.S. Treasury bond.

List Of Government-Sponsored Enterprises

While this article's focus is primarily on mortgage GSEs, other industries receive assistance through government sponsored enterprises.

Mortgage GSEs

We have discussed the below companies a bit above already, but for mortgage GSEs there are:

  • 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.

Student Loan GSEs

  • Sallie Mae. The Student Loan Marketing Association formerly collected student loans on behalf of the U.S. Department of Education, but since 2004 has been an entirely private student loan servicer.

Agricultural GSEs

  • 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.

The Bottom Line: GSEs Help Make Homeownership Possible

Without government-sponsored enterprises 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.

Educating yourself on how mortgage investors work can be useful in understanding the mortgage industry, especially when considering one of these loans.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

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Sa El

Sa El is the Co-Founder of Simply Insurance & Credit Knocks. Along with being a licensed real estate agent, he is also a licensed Insurance Agent with over 11 years of experience in the industry. He is an entrepreneur, insurance educator, and freelance writer.