What is a government-sponsored enterprise (GSE)?

A government-sponsored enterprise (GSE) is a quasi-governmental company that improves credit flow to specified U.S. economic sectors. These privately owned entities provide public financial services under congressional legislation. GSEs help students, farmers, and homeowners borrow.

For instance, Freddie Mac existed as a housing GSE. It promoted middle- and working-class homeownership. Freddie Mac is a mortgage GSE.

Fannie Mae is another mortgage GSE example. This business aims to enhance loan flow in the housing sector and lower costs.

How GSEs Work

GSEs do not perform public lending. Instead, they guarantee third-party loans and acquire them in the secondary market, funding lenders and financial institutions.

GSEs issue agency bonds, both short- and long-term. The independence of an agency bond issuer from the federal government affects its default risk. Many agency bond investors have their interest payments excluded from state and local taxes.

Unlike Treasury bonds, GSE bonds are not U.S. government liabilities but have implicit government support. These securities yield higher than Treasury bonds because of increased credit and default risk.

Government-sponsored enterprises

Established in 1916, the Farm Credit System (FCS) was the first GSE serving the farming industry. Federally chartered, borrower-owned lending institutions make up the FCS. They offer finance to farmers, ranchers, and other agricultural businesses.

The Federal Farm Credit Banks Money Corp. provides money for the FCS through bond sales on securities markets. The 1988-founded Federal Agricultural Mortgage Corp. (Farmer Mac) ensures timely repayment of principal and interest to agricultural bondholders.

In 1932, the government created the Federal Home Loan Bank (FHLB), controlled by over 8,000 community financial institutions, to boost housing. The chartering of Fannie Mae, Ginnie Mae, and Freddie Mac occurred in 1938, 1968, and 1970, respectively. Housing GSEs buy mortgages from secondary lenders. Proceeds from the sale enable lenders to offer additional credit to borrowers or mortgagees.

Unlike Fannie Mae, Ginnie Mae is government-owned and part of the U.S. Department of Housing and Urban Development (HUD). Thus, it’s not GSE.

Since 1972, Sallie Mae Corporation (SLM) has focused on the education industry. The institution stopped servicing and collecting federal student loans for the U.S. Department of Education in 2004. Sallie Mae currently provides private student loans, guidance on funding higher education, and government loan programs.

Special Considerations

GSEs are among the largest U.S. financial institutions because of their secondary market lending. Even one GSE bankruptcy might cause a market crash and economic devastation. Critics call GSEs sneaky corporate welfare beneficiaries since the government guarantees they won’t collapse.

After the 2008 subprime mortgage crisis, Fannie Mae and Freddie Mac got $187 billion in taxpayer aid. The purpose of this substantial sum was to reduce the negative impact of the wave of defaults on the housing market and national economy. They are also placed in government conservatorship. Since then, both agencies have returned their bailouts but remain under Federal Housing Finance Agency oversight.

A government-sponsored enterprise?

Congress formed a GSE to promote credit in specific sectors of the U.S. economy, notably real estate. GSEs differ from the government. Privately owned GSEs differ from federally operated government entities.

An example of a government-sponsored enterprise

Fannie Mae, Freddie Mac, and FHLB are housing financing GSEs. Sallie Mae is a student loan GSE. FCS and Farmer Mac are agricultural GSEs.

Is Freddie Mac government-backed?

Yes. The housing loan company, Freddie Mac, is government-sponsored. Freddie Mac is a housing GSE and “federally chartered, shareholder-owned, private company with a public mission to provide stability in and increase the liquidity of the residential mortgage market,” according to The White House. Freddie Mac also helps low- and moderate-income families in underserved communities get mortgage credit.

Bottom Line

Congress authorized government-sponsored enterprises (GSEs) for real estate to boost stability and liquidity. GSEs do not lend to consumers. Instead, they guarantee credit products, making finance more accessible, especially for unlikely borrowers.

Conclusion

• A government-sponsored enterprise (GSE) is a quasi-governmental company that boosts financing for specified U.S. industries.
• GSEs provide liquidity by guaranteeing third-party loans and purchasing them in the secondary market rather than directly lending to the public.
• Short- and long-term agency bonds issued by GSEs have implicit U.S. government support.
• Government-sponsored companies include Fannie Mae and Freddie Mac.