To enhance the flow of credit to specific sectors of the American economy a government-sponsored enterprise (GSE) got established.
A GSE is a governmental entity, which was created by Congress, even if these agencies are privately held they provide public financial services.
GSEs facilitate borrowing opportunities for a variety of individuals, including farmers, students, and homeowners.
In the housing sector the agency, Freddie Mac (Federal Home Loan Mortgage Corporation) was initially created as a GSE.
The intention was to encourage homeownership to the middle and working classes. Another mortgage GSEs like Freddie Mac are – the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Ginnie Mae).
Both the Fannie Mae and Ginnie Mae were introduced to improve the flow of credit in the housing market and for reducing the cost of that credit.
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.
A government-sponsored enterprise (GSE) is an almost governmental entity that is established to improve the flow of credit to specific sectors of the country’s economy.
GSEs do not lend money directly to the public, instead, they ensure liquidity by guaranteeing third-party loans and purchasing loans in the secondary market.
GSEs also issue short- and long-term bonds that are called agency bonds, which carry the implicit backing of the American government.
Fannie Mae and Freddie Mac, the Mortgage issuers are two examples of government-sponsored enterprises (GSEs).
Today’s post is for those investors who have a few private mortgage lenders lined up or maybe a few private mortgage lenders that are coming to you and work with you for your real estate deal.
A private mortgage lender is a person or entity who provides you a private mortgage loan that is not through a financial institution like a bank or a lender.
It could be funds acquired through friends, family members, businesses, acquaintances, or any other private source.
Maybe you have two or three different private mortgage lenders and once you meet them how do you decide which is the right private mortgage lender to work with for your real estate purchases.
That is what we are going to cover in today’s post.
The first thing that you got to do is ask a lot of questions. Do not start throwing deals at them.
There are many questions that you can ask them like, What is the source of the money? The reason why you want to ask that question to the private mortgage lender is to understand how you want to structure that deal.
For example, if the source of the private mortgage that you are going to receive from the private lender is from a HELOC, the interest rate on the loan might be higher as the lender have to make the payment and earn profit by giving the loan.
If you have a private mortgage lender that is looking to retire in two years Vs a private mortgage lender who is young and happens to have enough funds to invest for your private mortgage, these are two separate goals.
Try to know if they have short term or long term goal, which eventually will help you set structure for your private mortgage.
The next thing that you want to do to pick the right private home loan lender is to make sure that they are on board for a win-win situation with you.
There are predatory lenders out there that pose private money and you don’t want to work with such lenders.
To enroll the private mortgage lenders into win-win conversations, you might want to talk about monthly payments.
The next thing that you want to talk about is the term and rate for your private mortgage.
Make sure the rate and term are according to your financial budget and also benefiting the lender making it a perfect win-win situation.
You can get favorable loan terms to ensure that the private home loan lender’s goals are met and he is making an investment that is worth his money.
The bottom line is, the way you evaluate a private mortgage lender is to ask lots of questions and to make sure you structure win-win.
There might be lots of hurdles for you to jump through, weeks or months to get the closings are not winning for you, High-interest rates are not winning for you.
Wins for you are velocity to close. It might also be a win for you to be able to get into a deal that is just a favorable rate and terms or just knowing that the money is there as soon as you need it.
Be prepared to open up your door and show them what is in it for them. And that is how you pick the right private mortgage lender.