A government-sponsored enterprise (GSE) is a type of
financial services
Financial services are service (economics), economic services tied to finance provided by financial institutions. Financial services encompass a broad range of tertiary sector of the economy, service sector activities, especially as concerns finan ...
corporation created by the
United States Congress
The United States Congress is the legislature, legislative branch of the federal government of the United States. It is a Bicameralism, bicameral legislature, including a Lower house, lower body, the United States House of Representatives, ...
. Their intended function is to enhance the flow of
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
to targeted sectors of the economy, to make those segments of the
capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
more efficient and transparent, and to reduce the risk to investors and other suppliers of capital. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors primarily by reducing the risk of capital losses to investors:
agriculture
Agriculture encompasses crop and livestock production, aquaculture, and forestry for food and non-food products. Agriculture was a key factor in the rise of sedentary human civilization, whereby farming of domesticated species created ...
education
Education is the transmission of knowledge and skills and the development of character traits. Formal education occurs within a structured institutional framework, such as public schools, following a curriculum. Non-formal education als ...
. Well known GSEs are the Federal National Mortgage Association, known as
Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
, and the Federal Home Loan Mortgage Corporation, or
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Farm Credit System. It initiated GSEs in the home finance segment of the economy with the creation of the
Federal Home Loan Banks
The Federal Home Loan Banks (FHLBanks, or FHLBank System) are 11 U.S. government-sponsored banks that provide liquidity to financial institutions to support housing finance and community investment.
Overview
The FHLBank System was chartered by ...
in 1932; and it targeted
education
Education is the transmission of knowledge and skills and the development of character traits. Formal education occurs within a structured institutional framework, such as public schools, following a curriculum. Non-formal education als ...
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
A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
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.
Backing of US currency
The U.S. Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts into circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.
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. This is primarily done by some form of guarantee that limits the risk of capital losses to those supplying funds. Presently, GSEs primarily act as financial intermediaries to assist lenders and borrowers in housing and agriculture. Fannie Mae and Freddie Mac, the two most prominent GSEs, purchase mortgages and package them into mortgage-backed securities (MBS), which carry the financial backing of Fannie Mae or Freddie Mac. Because of this GSE financial backing, these MBS are particularly attractive to investors and are also eligible to trade in the "to-be-announced," or "TBA" market.
In addition, the GSEs created a
secondary market
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of ...
in loans through guarantees, bonding and
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 (or other non-debt assets which generate receivables) and sellin ...
. This has allowed
primary market The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the issuer, with the issuer being paid the proceeds. A primary market means the market for new issues of securities, ...
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
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
and
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Federal Home Loan Banks
The Federal Home Loan Banks (FHLBanks, or FHLBank System) are 11 U.S. government-sponsored banks that provide liquidity to financial institutions to support housing finance and community investment.
Overview
The FHLBank System was chartered by ...
, 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
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
and
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.subprime mortgage crisis
The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
, which caused the U.S. government to bail out and put into
conservatorship
Under U.S. law, a conservatorship results from the appointment of a guardian or a protector by a judge to manage the personal or financial affairs of another person who is incapable of fully managing their own affairs due to age or physical or m ...
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 GSEs have challenged the "implicit guarantee" since before the sub-prime crisis.Kyl, Jon, "Problems at Freddie Mac and Fannie Mae: Too Big to Fail?" http://faculty.chicagobooth.edu/erik.hurst/teaching/fannie_too_big_to_fail.pdf, September 9, 2003.
List of GSEs
Housing
*The eleven
Federal Home Loan Banks
The Federal Home Loan Banks (FHLBanks, or FHLBank System) are 11 U.S. government-sponsored banks that provide liquidity to financial institutions to support housing finance and community investment.
Overview
The FHLBank System was chartered by ...
(FHLBanks) (1932)
*
Federal National Mortgage Association
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the Ne ...
(Fannie Mae) (1938)
*
Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Government National Mortgage Association
The Government National Mortgage Association (GNMA), or Ginnie Mae, is a government-owned corporation of the United States Federal Government within the Department of Housing and Urban Development (HUD). It was founded in 1968 and works to expa ...
(Ginnie Mae) (1968)
Veteran
* National Veteran Business Development Corporation (1999)
Federal Agricultural Mortgage Corporation
The Federal Agricultural Mortgage Corporation, also known as 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 ...
Crown corporation
Crown corporation ()
is the term used in Canada for organizations that are structured like private companies, but are directly and wholly owned by the government.
Crown corporations have a long-standing presence in the country, and have a sign ...
s of
Canada
Canada is a country in North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, making it the world's List of coun ...
—
Canada Mortgage and Housing Corporation
Canada Mortgage and Housing Corporation (CMHC; , SCHL) is Canada's federal crown corporation responsible for administering the ''National Housing Act'', with the mandate to improve housing and living conditions in the country.McAfee, Ann. 2013 ...
Government National Mortgage Association
The Government National Mortgage Association (GNMA), or Ginnie Mae, is a government-owned corporation of the United States Federal Government within the Department of Housing and Urban Development (HUD). It was founded in 1968 and works to expa ...
*
State-owned enterprise
A state-owned enterprise (SOE) is a business entity created or owned by a national or local government, either through an executive order or legislation. SOEs aim to generate profit for the government, prevent private sector monopolies, provide goo ...
*
Government-owned corporation
A state-owned enterprise (SOE) is a business entity created or owned by a national or local government, either through an executive order or legislation. SOEs aim to generate profit for the government, prevent private sector monopolies, provide goo ...
Nationalization
Nationalization (nationalisation in British English)
is the process of transforming privately owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization contrasts with p ...
*
Public Sector Undertaking
Public Sector Undertakings (PSU) in India are State-owned enterprise, government-owned entities in which at least 51% of stake is under the ownership of the Government of India or State governments of India, state governments. These types of f ...
(Indian state enterprise)
*
Public company
A public company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock exchange or in over-the-counter (finance), over-the-counter markets. A public (publicly traded) co ...
(public corporation)
*
State ownership
State ownership, also called public ownership or government ownership, is the ownership of an Industry (economics), industry, asset, property, or Business, enterprise by the national government of a country or State (polity), state, or a publi ...
*
Quasi-corporation
A quasi-corporation is an entity that exercises some of the functions of a corporation, but has not been granted separate legal personality by statute. For example, a public corporation with limited authority and powers such as a county or school ...
State-owned enterprises of the United States
The United States federal government chartered and owned corporations operate to provide public services. Unlike government agencies such as the Environmental Protection Agency, the Bureau of Indian Affairs, or independent commissions, such as ...
Unitary enterprise
A 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 that they use in their operations. This form is possibl ...
(Russian state enterprise)
*
Volkseigener Betrieb
The Publicly Owned Enterprise (; abbreviated VEB) was the main legal form of industrial enterprise in East Germany. These state-owned enterprise were all publicly owned and were formed after mass nationalisation between 1945 and the early 1960s, ...