Government-Sponsored Enterprises (GSEs)
A government-sponsored enterprise (GSE) is a financial services corporation created by Congress. The intended function is to:
- enhance the flow of credit to particular sectors of the economy (agriculture, home finance, and education);
- to make those segments of the capital market more efficient and transparent; and to
- reduce the risk to investors and other suppliers of capital.
The two most well known GSEs are the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac.
Congress created the first GSE in 1916 with the creation of the Farm Credit System. GSEs in the home finance sector began with the creation of the Federal Home Loan Banks in 1932. GSEs in the education sector began when Congress chartered Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become a fully private institution via legislation in 1995).
- Overview: “The federal government’s role in the mortgage market dates to the Depression and is considered by many to be substantial: Fannie Mae, Freddie Mac, and Ginnie Mae (officially the Government National Mortgage Association, which is part of the Department of Housing and Urban Development) together guarantee virtually all new mortgage-backed securities (MBS). With slightly less than $10 trillion in mortgages outstanding, the residential mortgage market is of central importance both to households and to lenders.
- As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac have special privileges and obligations. Their congressional charters give them a close relationship to the federal government that is widely (but not universally) viewed as an implicit federal guarantee of their bonds and MBS. Broadly speaking, their role is to ensure appropriate availability of mortgages to creditworthy households. By law, the GSEs purchase mortgages from lenders, and either hold the mortgages as investments or pool the mortgages into mortgage-backed securities, which are sold to institutional investors. The GSEs guarantee that investors in these MBS will receive timely payment of principal and interest even if the borrower becomes delinquent.
- In September 2008, the GSEs individually agreed with their regulator, the Federal Housing Finance Agency (FHFA), that unexpected mortgage delinquencies and resulting losses jeopardized their solvency. The GSEs agreed to direct government control, known as voluntary conservatorship, which is the equivalent of bankruptcy reorganization for a financial company. As part of the agreement to conservatorship, Treasury contracted to provide financial support to keep the GSEs solvent. Pursuant to this agreement, which has been amended three times, the federal government has purchased more than $187 billion in special stock from Fannie Mae and Freddie Mac. In addition, the government holds $821 billion in MBS issued by Fannie Mae and Freddie Mac. The agreement requires Treasury to provide up to $274 billion of additional funds, if necessary. In return for this support, Treasury receives special stock and other considerations. ” See CRS: GSEs and the Governments Role in Housing Finance
- Federal National Mortgage Association (Fannie Mae) is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression, the corporation’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending — increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations (or “thrifts”).
- Federal Home Loan Mortgage Corporation (Freddie Mac) is a public government-sponsored enterprise (GSE). In 1970, Congress established the Federal Home Loan Mortgage Corporation (Freddie Mac) to help savings-and-loan banks manage interest-rate risk. Initially, the Federal Home Loan Banks owned Freddie, but in 1989, Congress reorganized Freddie as a shareholder-owned for-profit company. Along with Fannie Mae, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. On September 7, 2008, the Federal Housing Finance Agency (FHFA) director announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA.
- The Government National Mortgage Association (Ginnie Mae) was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development (HUD), Ginnie Mae’s mission is to expand affordable housing finance in America by linking domestic and global capital to the nation’s housing finance markets, providing market liquidity to federally sponsored mortgage lending programs. Today, Ginnie Mae securities are the only mortgage-backed securities that are backed by the “full faith and credit” of the United States government, although some have argued that Fannie Mae and Freddie Mac securities are de facto or “effective” beneficiaries of this guarantee after the U.S. government rescued them from insolvency in 2008.
- Budget Treatment: Senate Budget Committee: “The Office of Management and Budget (OMB) and Congressional Budget Office (CBO) take differing approaches to the costs associated with the two GSEs in the federal budget. OMB focuses on money flowing in and out of the government; CBO, on the risks the government assumes in backing the two GSEs.”
- CBO’s Estimate of Federal Support: “In September 2008—after falling house prices and rising mortgage delinquencies threatened the GSEs’ solvency and impaired their ability to ensure a steady supply of financing to the mortgage market—the federal government took control of Fannie Mae and Freddie Mac in a conservatorship process. Because of that shift in control, the Congressional Budget Office concluded that the institutions had effectively become government entities whose operations should be reflected in the federal budget. By CBO’s projections under current law, the mortgage guarantees that the GSEs issue from 2017 through 2026 will cost the federal government $12 billion. That estimate reflects the subsidies inherent in the guarantees at the time they are made.” See CBO: Deficit Reduction Option – Raise Fannie Mae’s and Freddie Mac’s Guarantee Fees and Decrease Their Eligible Loan Limits
- Although the President’s budget documents have not included the activities of Fannie Mae and Freddie Mac in the budget totals, they provide financial information about the two entities for several years; see, for example, Budget of the U.S. Government, Fiscal Year 2010: Appendix, pp. 1339–1340.
- Federal Home Loan Bank System: The FHLBank System was chartered by Congress in 1932 and has a primary mission of providing member financial institutions with financial products and services that assist and enhance the financing of housing and community lending. Combined assets of the FHLBanks were $913.3 billion as of December 31, 2014. As a result of the Great Depression the FHLBanks were established by the Federal Home Loan Bank Board (FHLBB) pursuant to the Federal Home Loan Bank Act of 1932. As a result of the savings and loan crisis of the 1980s the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) abolished the FHLBB and transferred oversight responsibility of the FHLBanks to the Federal Housing Finance Board (FHFB). As a result of the late-2000s financial crisis the Housing and Economic Recovery Act of 2008 (HERA) replaced the FHFB with the Federal Housing Finance Agency (FHFA).
- Congress established the Farm Credit System (FCS) in 1916 to provide a reliable source of credit for farmers and ranchers. The FCS is a nationwide network of borrower-owned lending institutions and specialized service organizations. The FCS function is to provide a source of credit for American agriculture by making loans to qualified borrowers at competitive rates and providing insurance and related services. The Farm Credit System provides more than $304 billion in loans, leases, and related services to farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agribusinesses, and agricultural and rural utility cooperatives. Today, the Farm Credit System provides more than one-third of the credit needed by those who live and work in rural America.
- The Federal Agricultural Mortgage Corporation (Farmer Mac), is a stockholder-owned, publicly traded company that was chartered by the United States federal government in 1988 to serve as a secondary market in agricultural loans such as mortgages for agricultural real estate and rural housing. The company purchases loans from agricultural lenders, and sells instruments backed by those loans. In June 2008, Farmer Mac had $47.2 million invested in Fannie Mae shares. Over the next few months, in the wake of the Federal takeover of Fannie Mae and Freddie Mac, these investments lost about $44 million in value. The company also had significant investments in the newly-bankrupt Lehman Brothers Holdings. In response, the Farm Credit System purchased $60 million in Farmer Mac stock, and Zions Bancorporation of Salt Lake City purchased another $5 million in stock.
National Veteran Business Development Corporation (“Veterans Corporation”) was created under Pub. L. No. 106-50 to provide veterans with small business and entrepreneurship assistance. The Act authorized, and Congress appropriated to the corporation, $12 million in funding over 4 years, ending September 30, 2004. The Act also required that the Veterans Corporation implement a plan to raise private funds and become a self-sustaining corporation. GAO evaluated the corporation’s (1) efforts in providing small business assistance to veterans; (2) internal controls, including strategic planning; and (3) progress in becoming financially self-sufficient. Since GAO’s April 2003 report (GAO-03-434), the Veterans Corporation has continued to expand programs and refocus services in its efforts to provide small business assistance to veterans while achieving financial self-sufficiency.
- SLM Corporation (Sallie Mae) is a publicly traded U.S. corporation that provides consumer banking. Its nature has changed dramatically since it was set up in 1973. The company’s primary business is originating, servicing, and collecting private education loans. Sallie Mae previously originated federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP) and worked as a servicer and collector of federal student loans on behalf of the Department of Education. The company now offers private education loans and manages more than $12.97 billion in assets. Sallie Mae employs 1,400 individuals at offices across the U.S. In 2014 Sallie Mae spun off its loan servicing operation and most of its loan portfolio into a separate, publicly traded entity called Navient Corporation. Navient is the largest servicer of federal student loans and acts as a collector on behalf of the Department of Education.
Background Reports on GSEs:
- CBO: Deficit Reduction Option – Raise Fannie Mae’s and Freddie Mac’s Guarantee Fees and Decrease Their Eligible Loan Limits, Dec. 2016
- CBO: The Effects of Increasing Fannie Mae’s and Freddie Mac’s Capital, Oct. 2016
- Senate Budget Committee: Budget Perspectives for Fannie and Freddie, July 2016
- OMB: President’s FY 2017 Budget: Housing and Government Sponsored Enterprises, Feb. 2016
- CBO: Transitioning to Alternative Structures for Housing Finance, Dec. 2014
- BPC Forum Highlights Potential Budget Impact of Proposed GSE Reform Legislation, March 2014
- CRS: GSEs and the Governments Role in Housing Finance, Sept. 2013
- CBO: The Federal Role in the Financing of Multifamily Rental Properties, Dec. 2015
- CBO Testimony: The Budgetary Cost of Fannie Mae and Freddie Mac and Options for the Future Federal Role in the Secondary Mortgage Market, June, 2011
- CBO: Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market, Dec. 2010
- CBO: Budgetary Treatment of Fannie Mae and Freddie Mac, Jan. 2010