Government-sponsored enterprise (GSE)
What is a government-sponsored enterprise (GSE)?
A government-sponsored enterprise (GSE) is an organization chartered by Congress for the purpose of providing people with financial services. GSEs frequently deal with mortgages, including guaranteeing, holding, or selling them, but also provide credit to agricultural businesses and people seeking financial support for education. Today, the GSEs are publicly traded companies, but they continue to uphold their charter.
Government-sponsored enterprises were created in the early 20th century to “improve the efficiency of the capital markets.” They do this by extending credit to underprivileged communities through private industry in return for low interest rates. GSEs are not agencies of the government, although their business operations are strongly defined by the government’s priorities. Such organizations fall roughly into three categories:
- Agriculture: In fact, the very first GSE was the Federal Loan Bank, which was established in 1916 to provide credit to farmers throughout the country. The Federal Loan Bank was part of a Farm Credits System that continues to guarantee loans to support agriculture.
- Mortgages: The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, known as Fannie Mae and Freddie Mac, respectively, are GSEs that increase the liquid cash available for mortgages by buying them from banks and selling them to investors. While Fannie Mae and Freddie Mac don’t issue mortgages directly, a cooperative GSE system known as the Federal Home Loan Banks does write loans. Since 2008, these organizations have been regulated by the Federal Housing Finance Agency.
- Education: The Student Loan Marketing Association, or Sallie Mae, used to be sponsored by the government, but in the mid-1990s it became a fully private corporation. Sallie Mae is the country’s largest originator of student loans, which since 2014 it has managed through a spin-off company called Navient.
In all these industries, GSEs create liquidity by either directly adding cash into markets, as with loans they write, or by stabilizing the flow of capital that already exists by reducing the risk that banks incur when they lend money. GSEs are for-profit institutions, and some make money by securitizing the loans they own and selling them to investors, or by trading in debt markets at the low interest rates given them by the government. However, GSEs generally provide access to funds to ordinary Americans who otherwise would struggle to participate in capital markets.
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Government-sponsored enterprise (GSE) example
Old MacDonald has a farm. Banks near his farm used to be wary about extending credit to the farmers nearby, including Old Mac. But since 1971, when the Farm Credit Act came into law, he has been able to get loans for his farm through one of the banks that belongs to the Farm Credit System, a GSE administered by the Farm Credit Administration. With the extra cash on hand, Old Mac is able to build a new barn, and hire three new workers, thus increasing the amount of capital flowing through his community.