Policy Feature Issue: Government-Sponsored Enterprises (GSEs)

Background

Government Sponsored Enterprises (GSEs) are privately-held financial services corporations created by Congress to reduce the cost of capital, reduce the risk to capital suppliers, and increase the flow of credit to specific portions of the economy.  GSEs were created in order to aid homeowners, veterans, farmers, and (formerly) students in receiving access to federally-backed capital.  Debt securities issued by GSEs carry the implicit backing of the U.S. government, but are not a direct obligation of the U.S. government and as a result carry greater risk than securities issued directly by the U.S. Treasury.  These obligations usually carry a yield premium over Treasury securities with comparable maturity levels that vary with market volatility as a result of this risk.

Important GSEs

The Federal National Mortgage Association (Fannie Mae) was founded in 1938 and is the leading source of residential mortgage credit in the U.S. secondary market.  Fannie Mae’s goal is to guarantee loans from mortgage lenders that allow people to buy and refinance their homes.  It does so by securitizing mortgages, bundling them, and selling them as mortgage-backed securities (MBS), to private investors.  This increases the supply of money available for mortgage lending by allowing the reinvestment of assets from lenders (which further increases the number of lenders in the market).  From January 1, 2009 through March 31, 2013, Fannie Mae provided $3.5 trillion in mortgage credit, which accounted for 2.9 million home purchases and 10.6 mortgage refinancing.[1]

Federal Home Loan Mortgage Corporation (Freddie Mac) was founded in 1970, and has virtually the same business model and mission as Fannie Mae.  However, whereas Fannie Mae primarily buys mortgages issued by banks, Freddie Mac primarily buys mortgages issued by thrifts.  Thrifts, also known as savings and loans associations (S&L), are financial institutions that specialize in real estate lending for homes or residential properties.  These institutions are required to keep a certain percentage of their loan portfolio in housing-related assets.[2]

The Federal Home Loan Banks (FHLBanks) are 12 U.S. government-sponsored banks that provide low-cost and stable funding (known as advances) to financial institutions for mortgage loans and other economic development lending.  They collectively provide the largest source of mortgage credit in the U.S.  They are cooperative institutions and are governed by their member institutions.

The Financing Corporation (FICO), established by the Competitive Equality Banking Act of 1987, is a mixed-ownership government corporation whose sole purpose is to function as a financing vehicle for the Federal Savings & Loan Insurance Corporation (FSLIC) after the FSLIC was abolished (by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 also known as FIRREA) by issuing bonds.[3]  After the implementation of FIRREA, FICO bond payments were derived from the Federal Deposit Insurance Corporation (FDIC) Savings Association Insurance Fund (SAIF) premiums instead of FSLIC premiums.[4]

The Farm Credit System (FCS) is a nationwide system of borrower-owned financial institutions dedicated to lending.  Among these are the Farm Credit Banks (FCBs) which provide loans to 53 Agricultural Credit Associations (ACAs) and one Federal Land Credit Association (FLCA).  The Federal Agricultural Mortgage Corporation (Farmer Mac) has the mission of providing a secondary market for rural housing mortgages, and for other agricultural real estate loans.

Note: The Student Loan Marketing Association (also known as Sallie Mae) was created as a GSE in 1972 to originate student loans.  However, in 1997 it began the process of privatizing its operations, and it finished this process in 2004, which culminated in the termination of its federal charter.