Government-Sponsored Enterprises

Paper Summary:

This paper discusses the United States GSE set up, specifically the Fannie Mae and Freddie Mac firms. It looks at how the two mortgage giants played a crucial role in the 1980s and 1990s by helping to create an investor market for mortgage-backed securities, enabling home buyers to enjoy lower interest rates and easier credit terms while contributing to record homeownership rates.

From the Paper:

"Government-Sponsored Enterprises (GSE) were created by Congress in an effort to provide the home-mortgage market with financing. GSE's provide a variety of functions in the United States mortgage industry such as personal credit, alternative mortgages and education on mortgage and housing affordability ("Who We Are" para. 2). The American government established Fannie Mae and Freddie Mac to buy up billions of dollars worth of mortgages every year. Government-sponsored enterprises guarantee repayment of loans. Fannie Mae and Freddie Mac enterprises acquire funding by issuing agency bonds and bundle the home loans into mortgage-backed securities. Agency bonds are considered risky, especially when compared to U.S. Treasury bonds. The majority of treasury bonds are held primarily by large institutional investors. "

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