1.6. Government-Sponsored Enterprises

Government-Sponsored Enterprises (GSEs) are privately owned, corporate entities that are chartered by the federal government. Their purpose is to direct funds into areas of national importance where borrowing is in high demand but lending may be scarce.

GSEs are given certain privileges not provided to private corporations. They do not have to pay state and local taxes and are exempt from SEC oversight. They have access to a standing line of credit in excess of $2 billion, and their securities are issued and paid through the facilities of the Federal Reserve Bank.

Two important GSEs are the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac. Both entities are privately owned, publicly traded companies that purchase mortgages on the secondary market and pool them to create mortgage-backed securities (MBSs). An MBS is a debt security that pays investors using the mortgage payments made by the people whose mortgages are part of the MBS. Fannie (or Freddie) is considered the issuer of the MBS.

The Government National Mortgage Association, more commonly known as Ginnie Mae, is similar in purpose to Freddie Mac and Fannie Mae but is not a GSE. Instead, Ginnie Mae is a government agency that guarantees the timely payment of interest and principal of certain mortgage-backed securities. Unlike Fannie and Freddie, Ginnie Mae does not actually issue MBSs. Ginnie Mae securities are often issued by private companies, such as banks. Despite their differences, mortgage-backed securities issued by Fannie Mae and Freddie Mac and those backed by Ginnie Mae are all referred to as agency bonds.

So if an exam question describes an investor who buys a Ginnie Mae MBS, remember that the investor is buying a security with interest and principal payments that are backed by the full faith and credit of the U.S. government. Although Fannie and Freddie’s MBSs have