Government-sponsored enterprise
Encyclopedia
A government-sponsored enterprise (GSE) is a financial services
corporation created by the United States Congress
. Their function is to enhance the flow of credit
to targeted sectors of the economy and to make those segments of the capital market
more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture
, home finance and education. Congress created the first GSE in 1916 with the creation of the Farm Credit System
; it initiated GSEs in the home finance segment of the economy with the creation of the Federal Home Loan Banks
in 1932; and it targeted education
when it 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). The residential mortgage
borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. GSEs hold or pool approximately $5 trillion worth of mortgages.
In addition, the GSEs created a secondary market
in loans through guarantees, bonding and securitization
. This has allowed primary market
debt issuers to increase loan volume and decrease the risks associated with individual loans. This also provides standardized instruments (securitized securities) for investors.
, are owned by the corporations that use their services. GSE securities carry no explicit government guarantee of creditworthiness, but lenders grant them favorable interest rates, and the buyers of their securities offer them high prices. This is partly due to an "implicit guarantee" that the government would not allow such important institutions to fail or default on debt. This perception has allowed Fannie Mae and Freddie Mac to save an estimated $2 billion per year in borrowing costs. This implicit guarantee was tested by the subprime mortgage crisis
, which caused the U.S. government to bail out and put into conservatorship
Fannie Mae and Freddie Mac in September, 2008.
Every GSE prospectus contains the following text, or something virtually identical, in bold letters, and has since before the sub-prime loans were originated: "Neither the certificates nor interest on the certificates are guaranteed by the United States, and they do not constitute a debt or obligation of the United States or any of its agencies of instrumentalities other than Fannie Mae." Critics of the GSE's have explained and debunked the "implicit guarantee" since before the sub-prime crisis.
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
corporation created by the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
. Their function is to enhance the flow of credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
to targeted sectors of the economy and to make those segments of the capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
, home finance and education. Congress created the first GSE in 1916 with the creation of the Farm Credit System
Farm Credit System
The Farm Credit System is a federally chartered network of cooperatives and related service organizations that lends to agricultural producers, rural homeowners, farm-related businesses, and agricultural, aquatic, and public utility cooperatives in the United States...
; it initiated GSEs in the home finance segment of the economy with the creation of the Federal Home Loan Banks
Federal Home Loan Banks
The Federal Home Loan Banks are 12 U.S. government-sponsored banks that provide stable, on-demand, low-cost funding to American financial institutions for home mortgage loans, small business, rural, agricultural, and economic development lending...
in 1932; and it targeted education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
when it chartered
Chartered
Charter or Chartered might refer to different things:* Charter, a legal document conferring rights or privileges* Chartered , a professional credential* Chartered Semiconductor Manufacturing, a manufacturing company...
Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become a fully private institution via legislation in 1995). The residential mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. GSEs hold or pool approximately $5 trillion worth of mortgages.
Business
Congress established GSEs to improve the efficiency of capital markets and to overcome market imperfections which prevent funds from moving easily from suppliers of funds to areas of high loan demand. Presently, GSEs primarily act as financial intermediaries to assist lenders and borrowers in housing and agriculture.In addition, the GSEs created a secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
in loans through guarantees, bonding and securitization
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
. This has allowed primary market
Primary market
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process...
debt issuers to increase loan volume and decrease the risks associated with individual loans. This also provides standardized instruments (securitized securities) for investors.
Ownership and implicit guarantee
Some of the GSEs (such as Fannie Mae and Freddie Mac until 2008) have been privately owned but publicly chartered; others, such as the Federal Home Loan BanksFederal Home Loan Banks
The Federal Home Loan Banks are 12 U.S. government-sponsored banks that provide stable, on-demand, low-cost funding to American financial institutions for home mortgage loans, small business, rural, agricultural, and economic development lending...
, are owned by the corporations that use their services. GSE securities carry no explicit government guarantee of creditworthiness, but lenders grant them favorable interest rates, and the buyers of their securities offer them high prices. This is partly due to an "implicit guarantee" that the government would not allow such important institutions to fail or default on debt. This perception has allowed Fannie Mae and Freddie Mac to save an estimated $2 billion per year in borrowing costs. This implicit guarantee was tested by the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
, which caused the U.S. government to bail out and put into conservatorship
Conservatorship
Conservatorship is a legal concept in the United States of America, where an entity or organization is subjected to the legal control of an external entity or organization, known as a conservator. Conservatorship is established either by court order or via a statutory or regulatory authority...
Fannie Mae and Freddie Mac in September, 2008.
Every GSE prospectus contains the following text, or something virtually identical, in bold letters, and has since before the sub-prime loans were originated: "Neither the certificates nor interest on the certificates are guaranteed by the United States, and they do not constitute a debt or obligation of the United States or any of its agencies of instrumentalities other than Fannie Mae." Critics of the GSE's have explained and debunked the "implicit guarantee" since before the sub-prime crisis.
Housing
- The twelve Federal Home Loan BanksFederal Home Loan BanksThe Federal Home Loan Banks are 12 U.S. government-sponsored banks that provide stable, on-demand, low-cost funding to American financial institutions for home mortgage loans, small business, rural, agricultural, and economic development lending...
(FHLBanks) (1932) - Federal National Mortgage AssociationFederal National Mortgage AssociationThe Federal National Mortgage Association , commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise , though it has been a publicly traded company since 1968...
(Fannie Mae) (1938–2008) - Federal Home Loan Mortgage CorporationFederal Home Loan Mortgage CorporationThe Federal Home Loan Mortgage Corporation , known as Freddie Mac , is a public government sponsored enterprise , headquartered in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia....
(Freddie Mac) (1970–2008) - Financing CorporationFinancing CorporationThe Financing Corporation is a mixed-ownership United States government-sponsored enterprise that operated as a financing vehicle for the Federal Savings and Loan Insurance Corporation Resolution Fund. As of July 1997 its outstanding debt stood at $8.2 billion...
(FICO) (1987)
Farming
- Federal Farm Credit Banks (FCBanks) (1916)
- Federal Agricultural Mortgage Corporation (Farmer Mac) (1987)
Debt
As of July 1997, the debt of the major GSEs stood at:| Organization | Debt ($ in billions) |
|---|---|
| Federal National Mortgage Association Federal National Mortgage Association The Federal National Mortgage Association , commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise , though it has been a publicly traded company since 1968... (Fannie Mae) |
348.6 |
| Federal Home Loan Banks Federal Home Loan Banks The Federal Home Loan Banks are 12 U.S. government-sponsored banks that provide stable, on-demand, low-cost funding to American financial institutions for home mortgage loans, small business, rural, agricultural, and economic development lending... (FHLBanks) |
291.9 |
| Federal Home Loan Mortgage Corporation Federal Home Loan Mortgage Corporation The Federal Home Loan Mortgage Corporation , known as Freddie Mac , is a public government sponsored enterprise , headquartered in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia.... (Freddie Mac) |
161.5 |
| Farm Credit System Farm Credit System The Farm Credit System is a federally chartered network of cooperatives and related service organizations that lends to agricultural producers, rural homeowners, farm-related businesses, and agricultural, aquatic, and public utility cooperatives in the United States... (FCS) Farm Credit Banks (FCBanks) |
61.9 |
| Student Loan Marketing Association (Sallie Mae) | 45.5 |
| Resolution Funding Corporation Resolution Funding Corporation The Resolution Funding Corporation is a government-sponsored enterprise that provides funds to the Resolution Trust Corporation, which was established to finance the bailout of savings and loan associations in the wake of the savings and loan crisis of the 1980s in the United States... (REFCORP) |
30.0 |
| Financing Corporation Financing Corporation The Financing Corporation is a mixed-ownership United States government-sponsored enterprise that operated as a financing vehicle for the Federal Savings and Loan Insurance Corporation Resolution Fund. As of July 1997 its outstanding debt stood at $8.2 billion... (FICO) |
8.2 |
| Farm Credit System (FCS) Financial Assistance Corporation (FAC) | 1.3 |
| Total debt | 948.8 |
See also
- Government-owned corporationGovernment-owned corporationA government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
- SLM CorporationSLM CorporationSLM Corporation is a publicly traded U.S. corporation whose operations are originating, servicing and collecting on student loans.Managing more than $180.4 billion in debt for more than 10 million borrowers, the company primarily provided federally guaranteed student loans originated under the...
, also known as Sallie Mae, a former GSE - Danish mortgage marketDanish mortgage marketThe mortgage industry of Denmark has proved very effective in providing borrowers with flexible and transparent loans on conditions close to the funding conditions of capital market players. Simultaneously, the covered mortgage bonds transfer market risk from the issuing mortgage bank to bond...
- Mortgage GSE controversy
- Government-linked company
- Crown corporations of CanadaCanadaCanada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
— Canada Mortgage and Housing CorporationCanada Mortgage and Housing CorporationCanada Mortgage and Housing Corporation is a Crown corporation, owned by the Government of Canada, founded after World War II to provide housing for returning soldiers... - Public companyPublic companyThis is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
(public corporation) - Public Sector Undertaking (Indian state enterprise)
- Public ownership
- StatsforetakStatsforetakStatsforetak or SF, meaning State Enterprise is a type of company in Norway. SFs are wholly owned by the Government of Norway, but it does not hold limited liability in the company...
(Norwegian state enterprise) - State-Owned Enterprises of New ZealandState-Owned Enterprises of New ZealandState-owned enterprises in New Zealand are registered companies listed under Schedules 1 and 2 of the State-Owned Enterprises Act 1986...
- Unitary EnterpriseUnitary enterpriseA unitary enterprise is a government-owned corporation in Russia and some other post-Soviet states. Unitary enterprises are business entities that have no ownership rights to the assets they use in their operations....
(Russian state enterprise) - Volkseigener BetriebVolkseigener BetriebThe Volkseigener Betrieb was the legal form of industrial enterprise in East Germany...
(East German state enterprise) - NationalizationNationalizationNationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
External links
- Investopedia Definition of Government-Sponsored Enterprise - GSE
- Fannie Mae
- Freddie Mac
- FHL Bank System
- Farmer Mac
- OFHEO - regulator of Fannie Mae and Freddie Mac
- FHFB - regulator of the Federal Home Loan Bank System
- FCA - regulator of Farmer Mac and the Farm Credit System
- The Banker: Striking out Fannie Mae - 5 January 2004 (discusses the U.S., European, and Danish mortgage markets)