Government-sponsored enterprises (GSEs) are government- created institutions designed to close perceived gaps in the country’s capital markets for agriculture and housing. The major government-sponsored enterprises are the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Farm Credit System, Student Loan Marketing Association (Sallie Mae), and the Federal Home Loan Bank System. Most government-sponsored enterprises are wholesalers in financial markets, buying securities from retail lenders and packaging them for resale to investors and investment groups. The Farm Credit System (FCS) is an exception, in that it is a retail lender to agricultural and rural customers.
The need for government-sponsored enterprises grew out of the Great Depression. Over 10,000 banks failed during a two-year period, creating a credit crisis in the country. The 1934 National Housing Act established the Federal Housing Administration (FHA). Title III of the act provided for the chartering of national mortgage associations by the federal housing administrator. These associations were to be private corporations regulated by the administrator, and their chief purpose was to buy and sell mortgages to be insured by FHA under Title II. Only one association, Fannie Mae, was ever formed under this authority.
By revision of Title III in 1954, Fannie Mae was converted into a mixed-ownership corporation, its preferred stock to be held by the government and its common stock to be privately held. By amendments made in 1968, the Federal National Mortgage Association was partitioned into two separate entities, the Government National Mortgage Association (Ginnie Mae) and the Federal National Mortgage Association (Fannie Mae). Ginnie Mae remained in the government, and Fannie Mae became privately owned by retiring the government-held stock.
Freddie Mac, known as the smaller cousin of Fannie Mae, was established in 1970 to buy conventional (not federally insured) mortgage loans. In 1989 Freddie Mac became a private stockholder-owned corporation, but with a mixture of oversight. Freddie Mac’s board of directors includes 13 members elected by stockholders and five appointed by the president of the United States. Freddie Mac is the 27th-largest corporation in the country, with over $500 billion in assets.
The Farm Credit System (FCS) was the first government-sponsored enterprises, established under the Federal Farm Loan Act of 1916. The FCS was funded with government capital and tax-exempt bonds to extend long-term loans to agriculture. Over the years, FCS has expanded and contracted with changes in the agricultural industry, but it continues to provide direct lending in rural areas of the country.
The Federal Home Loan Bank (FHLB) System includes 12 regional banks that provide loans (“advances”) to retail financial lenders. While commercial banks make up the majority of FHLB System members, proposed changes in federal laws would expand credit to small community banks, allowing them to utilize new categories of collateral for loans and meet lesser standards for entry into the FHLB System. Private lenders are challenging these proposed changes as well as a new program that would allow direct lending through the System.
The fifth major government-sponsored enterprises, Sallie Mae, was established in 1972 as a federally chartered, stockholder-owned corporation. Sallie Mae controls a variety of education-lending programs, the most widely known being the Student Loan Marketing Association (SLMA), from which Sallie Mae’s name was derived. In 1997 it was reorganized with SLM Holding Company, and in 2000 it was renamed USA Education, Inc. Through a variety of subsidiaries, Sallie Mae is the leading student lending, servicing, and loan-guaranteeing organization in the country. The GSE part of Sallie Mae must be dissolved by 2008.
The major issue facing all GSEs is the implied federal guarantee of their securities. This decreases the perceived market risk, reducing the cost of capital for GSEs. With lower-cost borrowing, government-sponsored enterprises can earn greater gross-profit margins than competing lending institutions. A second issue to “mission creep,” the expansion of GSEs beyond their original intent. Direct lending, on-line loan applications, home-mortgage insurance, and other lendingrelated activities that are traditionally the domain of commercial, retail financial institutions are an increasing source of conflict between government-sponsored enterprises and the financial market.
Further reading
“Government-sponsored Enterprises.” Available on-line. URL: www.aba.com; “About Us.” Student Loan Marketing Corporation. Available on-line. URL: www.salliemae.com.