how a government sponsored enterprise gse works
gses do not lend money to the public directly instead they guarantee third party loans and purchase loans in the secondary market thereby providing money to lenders and financial institutions gses also issue short and long term bonds referred to as agency bonds the degree to which an agency bond issuer is considered independent of the federal government impacts the level of its default risk bond investors holding most but not all types of agency bonds have their interest payments exempt from state and local taxes although gse bonds carry the implicit backing of the u s government unlike treasury bonds they are not direct obligations of the u s government for this reason these securities offer a slightly higher yield than treasury bonds since they have a somewhat higher degree of credit risk and default risk examples of government sponsored enterprises gses the first gse the farm credit system fcs was created in 1916 to serve the farming sector 2 the fcs still exists as a network of federally chartered borrower owned lending institutions they are tasked with providing an accessible source of credit to farmers ranchers and other entities involved in agriculture the fcs receives its funding capital from the federal farm credit banks funding corp which sells bonds on securities markets 3 another farming gse the federal agricultural mortgage corp farmer mac was created in 1988 and guarantees the timely repayment of principal and interest to agricultural bond investors 4to stimulate the housing segment in 1932 the government established the federal home loan bank fhlb system which is owned by more than 8 000 community financial institutions 56 fannie mae ginnie mae and freddie mac were chartered later in 1938 1968 and 1970 respectively 7 the housing gses purchase mortgages from lenders on the secondary mortgage markets the proceeds from the sale are used by lenders to provide more credit to borrowers or mortgagors one difference between ginnie mae and fannie mae is that ginnie mae is owned by the government and part of the u s department of housing and urban development hud therefore it s not considered a gse slm corp sallie mae was created in 1972 to target the education sector while the establishment originally serviced and collected federal student loans on behalf of the u s department of education it ended its ties to the government in 2004 8 sallie mae now offers student loans privately along with advice on financing higher education and federal loan programs special considerationsthe aggregate loans of gses in the secondary market make them some of the largest financial institutions in the united states a collapse of even one gse could lead to a downward spiral in the markets which could lead to an economic disaster since they have an implicit guarantee from the government that they will not be allowed to fail gses are considered by critics to be stealth recipients of corporate welfare in fact following the 2008 subprime mortgage crisis fannie mae and freddie mac received a combined 187 billion worth of federal assistance 9 this large sum was intended to mitigate the negative impact that the wave of defaults was wreaking on the housing market and the national economy they were also placed into government conservatorship both agencies have repaid their respective bailouts since then though they remain under the control of the federal housing finance agency 10