Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.
When trying to buy a home, you may encounter several unfamiliar terms, including Government-Sponsored Enterprise (GSE) and Government-Sponsored Mortgage Loans. However, when you try to grasp how they work, the jargon may be confusing and make something basic appear quite sophisticated.
In this article, you’ll learn more about GSE, how it works, various examples of GSE, and the workings of GSE mortgages.
Keep scrolling to learn more.
What Does GSE Stand For?
A government-sponsored enterprise (GSE) is an organization established by Congress to provide financial services to the public. GSEs deal with mortgages regularly, including guaranteeing, keeping, and selling them, but they also give credit to agricultural enterprises and those seeking financial assistance for schooling. Although the GSEs are now publicly traded enterprises, they adhere to their mandate.
>> More: Best Mortgage Lenders
What Is a Government-Sponsored Enterprise (GSE)?
A government-sponsored enterprise (GSE) is a quasi-governmental, privately-held agency established by Congress to improve credit flow in some United States’ economy regions. 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 the government supports but runs 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 resell them as mortgage-backed securities to investors in the secondary market to boost capital flow in the real estate market.
How Government-Sponsored Enterprises Work
In crucial areas of the economy, government-sponsored firms have been developed. For example, in the housing industry, Congress founded the Federal Home Loan Bank in 1932 to function as a wholesale bank providing support for housing mortgages provided by commercial banks.
To improve commercial and mortgage bank liquidity, the network of 12 Federal Home Loan Banks now distributes loans to local banks at preferential interbank lending rates. In education, Congress formed the Student Loan Marketing Association, known as Sallie Mae, to guarantee student loans made by local financial institutions. Fannie Mae and Freddie Mac, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, respectively, provide guarantees and low-cost credit to enable housing loans.
None of these GSEs make direct loans to the general population. Instead, they supply capital market liquidity by guaranteeing third-party loans, purchasing loans on the secondary market, and lending to financial institutions. They issue stock and short and long-term debt and charge fees for their financing services as for-profit financial institutions.
Even though GSEs are not subsidized, their implicit federal guarantee permits them to trade at a lower cost than strictly private securities.
Examples of Government-Sponsored Enterprises
Let’s look at some of the most well-known government-sponsored mortgage enterprises: Federal Home Loan Banks, Fannie Mae, Freddie Mac, and Farmer Mac.
The Federal National Mortgage Association (FNMA or Fannie Mae). This GSE, established in 1938, provides mortgage funding by purchasing mortgages from large commercial banks and then selling them to investors.
Freddie Mac (Federal Home Loan Mortgage Corporation) was established in 1970. Freddie Mac is different from its cousin Fannie Mae in that it buys mortgages from smaller banks and lenders.
Federal Home Loan Banks
The Federal Home Loan Banks, founded in 1932 and made up of numerous banks and lenders, were the first mortgage-based GSEs. The only GSE that can directly issue mortgages is the Federal Home Loan Banks system.
Congress established the Federal Agricultural Mortgage Association in 1988. Farmer Mac’s role is to ensure agricultural bond investors get their money back in principal and interest. Farmer Mac serves to stabilize the agricultural financing market by ensuring payment to these investors.
The Student Loan Marketing Association collected student loans on behalf of the United States Department of Education, but it has been a completely private student loan servicer since 2004.
Federal Farm Credit System Corporation
The first GSE, established in 1916, gave financing to farmers and ranchers to help the country’s agricultural sector. It comprises a network of lending institutions and associations that work together.
Is Ginnie Mae a Government-Sponsored Enterprise?
Ginnie Mae, Fannie Mae, and Freddie Mac are three organizations that are frequently, but incorrectly, referred to collectively as “agencies.” In actuality, only Ginnie Mae is a wholly-owned subsidiary of the United States government, whereas Fannie Mae and Freddie Mac are Government Sponsored Enterprises (“GSEs”).
Ginnie Mae is a self-sustaining, profitable, and owned government enterprise within the United States Department of Housing and Urban Development (HUD). In contrast, the GSEs are public corporations created by Congress but owned by shareholders.
How Do GSE Mortgage Loans Work?
Government-sponsored enterprises (GSEs) are privately held, Congress-chartered financial firms established to provide financial services and an additional source of credit to specified sectors of the U.S. economy. Most notably, they are utilized in real estate to assist new homebuyers in lowering their costs and obtaining approvals despite having low credit scores.
GSE home mortgages have been in existence since the Federal Home Loan Banks (FHLB) system was founded in 1932. They are often employed by agricultural firms through agricultural GSEs and in the education sector, for example, through student loan GSEs. The Federal Farm Credit System Corporation, on the other hand, was founded even earlier, in 1916.
GSEs do not make loans because Fannie Mae and Freddie Mac cannot provide mortgages. Traditional lenders, such as banks, can only do this; GSEs then approve lenders to provide government-backed loans. GSEs can guarantee installment loans, allowing banks to approve principal mortgage loans with less stringent conditions. For the borrower, this can mean:
- Obtaining approval despite a low credit score
- Increasing your borrowing limit
- Lower interest rates
GSE mortgage loans minimize risks for mortgage lenders, allowing them to accept more applicants. As a result, the increasing number of real estate acquisitions benefits the economy. Borrowers can apply for a GSE mortgage loan as a single or joint applicant, which is great news for couples. GSEs assist people who want to acquire houses, apartments, and other traditional property.
GSE Bonds vs. Treasury Bonds
Both private entities and the United States Treasury can issue bonds; however, certain distinctions exist. One notable distinction between a GSE bond and a Treasury bond is that GSEs are not backed by the full faith and credit of the United States government, but Treasury bonds are.
When a bond is issued with full faith and credit, the government promises to repay the investor’s principal and interest when the bond matures. GSE bonds have both credit and default risk, and their yield is often higher than that of a U.S. Treasury bond.
Is FHA a Government-Sponsored Enterprise?
No, Federal Housing Administration is not a government-sponsored enterprise. Today, the FHA is charged with improving housing standards and conditions, providing adequate home financing through mortgage loans, and stabilizing the mortgage market. The FHA is part of the Department of Housing and Urban Development and is the only government agency completely self-funded.
>> More: What Is an FHA Loan?
Bottom Line: Government-Sponsored Enterprises
The response to the question, “What is a Government-Sponsored Enterprise?” is probably a lot easier than you expected. It is essentially a government-backed financial organization that can guarantee your loan agreement, increasing your chances of acceptance when contacting a bank. More importantly, not every mortgage applicant or prospective homebuyer requires a GSE mortgage. However, those who do may find that it expedites their loan acquisition.