What is a GSE and What Does It Do?
You may not have heard of them quite yet but consider this: the GSEs—government-sponsored enterprises—purchase, from various approved lenders, the majority of all residential loans originated in the United States. When most people in the industry hear the term “GSE” they think of the Federal National Mortgage Association or “Fannie Mae” and the Federal Home Loan Mortgage Corporation or “Freddie Mac,” although they are not the only entities that qualify as GSEs. These organizations were established by Congress to provide added liquidity to the housing market, which, until their creation, resided solely in the private market. Our focus here is on Fannie Mae and Freddie Mac because of their unique contribution to the United States residential housing market. To better understand these entities, let’s dive a little deeper into the world of the GSEs and answer some frequently asked questions (FAQs) about how they work.
What Do the Government-Sponsored Enterprises (GSEs) Do?
While the GSEs’ services are varied and vast, their purpose boils down to one basic goal: the GSEs were created to bring stability and uniformity to the nationwide housing finance market and improve access to home ownership in the United States. Unlike private companies, these entities have closer ties to the government and for that reason the GSEs must follow specific guidelines under which they function. In turn, they set forth requirements to which their approved mortgage selling and servicing partners must adhere.
No other entity purchases more residential home loans than Fannie Mae, with Freddie Mac occupying the second position. By satisfying GSE requirements, lending institutions can sell the eligible loans they have originated to one or the other of the GSEs. In essence, this creates a “liquidity cycle”: lender originates loan, sells loan to either Fannie or Freddie, and then puts that capital right back to work making additional loans to eligible borrowers.
In an oversimplified example, let’s think of a new development where hundreds of new residential homes are being built. These dwellings may be single family houses, condos, coops, or even a combination of more than one ownership type. Lenders can only lend up to the amount that they have available, which could limit how many buyers could obtain financing to purchase those new residential homes. However, by having a contractual agreement with one, or both, of the GSEs, lenders can continue to provide loans to homebuyers as the lenders continue to sell loans to the GSEs. This has a ripple effect across the entire economy, creating not just the housing units but impacting everything else including building materials, labor, appliances, the creation of infrastructure such as roads and public services and so on. Without the GSEs’ willingness to purchase loans from lenders, much more than just the home buying and selling process would be impacted.
Are GSEs Only Involved with Single-Family Homes?
No. Fannie Mae and Freddie Mac also purchase condo and coop loans, as well as some other types of housing. GSE guidelines for condos and coops are more complex than for single-family homes and require a robust understanding of the subtleties and nuances associated with this important type of financing.
Are There Other GSEs?
Yes. There are other entities targeted with supporting and enhancing other housing sectors of the U.S. economy. For example, the Government National Mortgage Association (GNMA) or “Ginnie Mae,” is one of several other government-sponsored enterprises. Ginnie Mae focuses on providing low-cost financing for federal housing programs.
What Else Do GSEs Do?
The GSEs sponsor various programs, products, and tools to help make housing more accessible. For example, in 2022, Fannie Mae launched the three-year Equitable Housing Finance Plan which was recently updated to remove or reduce barriers to sustainable homeownership and to increase accessibility to mortgage credit and on housing stability.
Who Oversees the GSEs?
The Federal Housing Finance Agency (FHFA) is responsible for ensuring that Fannie Mae and Freddie Mac operate in a safe and sound manner and regulates and provides oversight and supervision.
Although the GSEs exist in the background of residential lending, they serve an important function—supporting the residential housing market and, in fact, the U.S. economy. Project Risk Evaluation Partners (PREP) has the knowledge and expertise in understanding the GSE guidelines and requirements. Let PREP be your resource on the impact of GSE guidelines in the residential mortgage marketplace.