Understanding what a government-sponsored enterprise (GSE) is, and what their relationship with mortgage lending is.
A government-sponsored enterprise (GSE) is a type of financial service entity created by Congress to help improve credit flow in specific areas of the United States economy. There are quite a few GSEs that support the real estate market but there are also some that serve other distinct areas like education and agriculture. But, what exactly is a GSE, what’s their purpose and how do they work?
Created in the early 20th century, U.S. GSEs were designed with the intention of promoting specific economic and social goals by providing monetary support and stability in key economic sectors. The very first GSE was established in 1916 and was known as the Federal Land Banks under the Federal Farm Loan Act. This was created to give long-term loans to farmers at affordable interest rates, combat the challenges of accessing credit, and promote agricultural productivity.
Fannie Mae, formally known as the Federal National Mortgage Association (FNMA) was created in 1938 during the Great Depression. This was designed to provide liquidity to the mortgage market by purchasing mortgages from banks and other lenders, ultimately making homeownership more accessible and affordable. In 1970, Freddie Mac, also known as Federal Home Loan Mortgage Corporation, was created similarly to promote competition in the secondary mortgage market. Fannie and Freddie are two familiar names in the industry, as these GSEs still serve the housing industry today.
While they are government-supported, GSEs operate in a similar way to private corporations and are oftentimes viewed as a bridge between the government and the private sector. They are designed to provide public financial services and help facilitate borrowing for groups of individuals including homeowners, students and farmers.
As mentioned, GSEs in the housing sector, for example, are responsible for ensuring that future homeowners can get affordable mortgages to buy their homes. This certainly encourages lending, but it also allows lenders to offload risk in the secondary market. In the education sector, GSEs focus on making education more accessible through student loans. Providing financial support and stability is crucial when promoting education and making it accessible to as many individuals as possible, proving the necessity of GSEs.
GSEs are a key component of the housing industry. Though their role has changed over the years, they still hold an important place in the market. Instead of issuing a mortgage loan directly to a consumer, GSEs provide third-party loans and purchasing guarantees in the secondary mortgage market, thereby providing money to lenders so they can keep lending to more buyers.
Housing GSEs have traditionally focused on helping low-income buyers get into homes, making homeownership more accessible to those who may not have been able to buy a home otherwise. To ensure this, the Federal Housing Finance Agency (FHFA) is responsible for overseeing Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, consisting of 11 banks. The FHFA was established by the Housing and Economic Recovery Act of 2008 (HERA). Ever since then, they have been responsible for the effective supervision, regulation and housing mission oversight of the mortgage-based enterprises. They work to ensure that they are operating in a safe and sound manner. Collectively, according to the FHFA website, the three GSEs provide more than $8 million in funding for the U.S. mortgage market, highlighting their impact on this industry.
Looking at the big picture, the role of these GSEs is very important, particularly in the mortgage space. Without these GSEs in this industry, it would be very difficult to buy a home, especially if you have a low credit score or low income. Thanks to these enterprises, lenders have more access to liquidity, ultimately keeping the housing market moving.