(GSE) Government Sponsored Enterprise: Top Guide 1 Must Know

The public does not get money from GSEs directly. Simply by guaranteeing third-party loans and purchasing loans in the inferior market, the GSEs supply money to lenders and financial institutions.

GSEs also issue short- and long-term bonds which are referred to as agency bonds. Bond investors holding most, but not all types of agency bonds, have their interest payments exempt from state and local taxes.

Even if the GSE bonds carry the indirect backing of the U.S. government, they are not direct obligations of the American government like the Treasury bonds. 

This is the reason why these securities will offer a slightly higher yield compared to the Treasury bonds because they have a somewhat higher degree of credit risk and default risk.

The Farm Credit System (FCS), was the first GSE, which got created in 1916 with the intention of serving the farming sector. 

To date, FCS exists, as a network of borrower-owned, federally chartered, lending institutions. 

Their task is to provide an accessible source of credit to farmers, ranchers, and other entities who are involved in agriculture.

The funding capital for FCS comes from the Federal Farm Credit Banks Funding Corporation, These banks sell the bonds on securities markets. 

The Federal Agricultural Mortgage Association (Farmer Mac) is another farming GSE, which was created in 1988 and guarantees the timely repayment of principal and interest to agricultural bond investors.

In 1932, the U.S. government established the Federal Home Loan Banks (FHLB) with the aim of stimulating the housing segment, which is owned by over 8,000 community financial institutions. Fannie Mae came into existence in 1938, the Ginnie Mae in 1968, and Freddie Mac in 1970. 

Mortgages are purchased from the lenders on the secondary mortgage markets by the housing GSEs. The lenders then use the proceeds from the sale to provide more credit to borrowers or mortgagors.

In 1972, Sallie Mae (SLM Corporation) was created to target the education sector. 

While originally Sallie Mae serviced and collected federal student loans on behalf of the U.S. Department of Education, in 2004 the establishment ended its ties to the government. 

Now Sallie Mae offers student loans privately, and also provides advice on financing higher education and federal loan programs.

The aggregate loans in the secondary market make GSEs some of the largest financial institutions in the country. 

Even if one GSE collapses it would lead to a downward spiral in the markets, and further lead to an economic disaster. 

GSEs are looked upon to be stealth recipients of corporate welfare by the critics because they have an absolute guarantee from the government that they will not be allowed to fail.

Fannie Mae and Freddie Mac together received $187 billion worth of federal assistance after the 2008 subprime mortgage crisis. 

This large sum was intended to reduce the severe impact that the defaults wave was breaking up the housing market and affecting the national economy. 

The government-backed GSEs were also placed into government conservatorship. 

Since then, both agencies have repaid their respective bailouts even if they remain under the control of the Federal Housing Finance Agency.