What Are Mortgage GSEs?
If you’re familiar with Freddie Mac and Fannie Mae, then you’re familiar with Government Sponsored Enterprises, financial entities created by Congress to reduce borrowing costs for homeowners and to pursue certain public policy objectives. The latter is primarily related to expanding the efficiency of the capital markets. Fannie Mae and Freddie Mac do so by purchasing and then securitizing loans from Housing Finance Agencies, along with other lenders. These entities can then provide more mortgages to low- and moderate-income people. Federal Home Loan Banks provide support and advance affordable housing funds to their members. The federal government has been providing some form of mortgage GSE since 1916. Currently, GSEs hold approximately $5 trillion in mortgages.
How Mortgage GSEs Work
Housing GSEs, which include 11 Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Ginnie Mae), purchase mortgages on the secondary mortgage markets from lenders. When these mortgages are sold, lenders use the funds to provide credit to those purchasing homes. The GSEs do not lend money directly to the public. Besides purchasing secondary market loans, GSEs guarantee third party loans and issue agency bonds, which are short- or long-term bonds. These bonds are exempt from state and local taxes. While considered relatively safe, unlike U.S. Treasury bonds agency bonds do not have the full backing of the U.S. government, so while the risk of default is low, it does exist.
Fannie Mae and Freddie Mac also buy mortgages and create packages or pools of mortgage-backed securities. These securities are then sold to investors, who receive monthly interest income as the homeowners with underlying mortgages pay their monthly bill. However, due to the nature of the securities, the amount the investor receives each month may differ. You can buy these securities through a broker, with most requiring at least a $10,000 minimum investment. Mortgage backed securities are also available through mutual funds and have lower initial investment amounts.
It is generally believed the U.S. government would not allow agency bonds to default. The result would have a huge negative impact on the markets and overall economy. Along with their influence in the secondary mortgage market, GSEs are the largest financial institutions in the country. During the subprime mortgage crisis of 2008, the federal government put both Freddie Mac and Fannie Mae into conservatorship, but did not allow them to fail.
GSEs and the Average Homebuyer
GSEs, with the exception of Farm Credit Banks, do not lend money directly to individuals. However, if you purchase a home with a Federal Housing Administration loan, you are indirectly benefiting from a GSE. Since they were created by the Roosevelt administration in the 1930s, Freddie Mac, Fannie Mae and other GSEs have helped millions of people purchase homes, leading to home ownership as an integral and affordable part of the American Dream.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.