Government-Sponsored Enterprises

The Five GSEs

There are currently five GSEs. Two, Fannie Mae and Freddie Mac, were investor-owned companies that, until 2008, traded their stock on the New York Stock Exchange. In the fall of that year, the two companies fell into conservatorship, a process in which the government holds a failed financial institution with the purpose of restoring the firm to solvency and returning it to private hands. The federal government has made good on its implicit guarantee by essentially making the guarantee explicit: By infusing taxpayer funds to offset the two GSEs’ losses, the net worth of the two companies will always remain positive. This reassures investors in their debt obligations and mortgage-backed securities (MBSs) that the companies can continue to do business and provide continuing support to a mortgage market that was severely shaken by the financial crisis that broke in between 2007 and 2008.

As secondary market institutions, Fannie Mae and Freddie Mac do not originate residential mortgages. Instead, they purchase mortgages from the [Page 246]banks, thrift institutions, or mortgage companies that originate them. In its current state, the mortgage market requires government backing to function; federal housing programs and the two GSEs together currently provide funding for almost all of the residential mortgage market.

Another GSE, Farmer Mac, is a smaller institution. It provides credit as a secondary mortgage market institution serving rural America. Established in 1987, Farmer Mac almost failed in 2008 and had to be recapitalized by another GSE, the Farm Credit System (FCS). The FCS, the oldest GSE, is a system of district banks that is cooperatively owned by the farmers and rural borrowers to whom it provides credit. When it was established in 1917, the FCS overcame a classic market imperfection: It provided access to credit for creditworthy but isolated rural borrowers who otherwise found it hard to obtain loans on reasonable terms. The FCS pioneered several important innovations for rural borrowers, including self-amortizing loans, point-of-sale loans for farm equipment, variable rate loans, and lines of credit for farm borrowers.

Another cooperatively owned GSE is the Federal Home Loan Bank System (FHLBS). It was established in 1932 to provide funds to savings and loan (S&L) institutions during the Great Depression. Today the FHLBS provides credit to financial institutions, primarily banks and S&Ls, which own stock in one of the 12 regional Federal Home Loan Banks.

A sixth GSE, Sallie Mae, was a secondary market institution that supported higher education lending. It gave up its GSE status and became fully private, without any perception of government backing, in 2004.

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