# Understanding Government-Sponsored Enterprises: GSE Definition & Examples

## What Is a Government-Sponsored Enterprise (GSE)?

A government-sponsored enterprise (GSE) is a quasi-governmental entity established to enhance the flow of credit to specific sectors of the U.S. [economy](https://www.investopedia.com/terms/e/economy.asp). Created by acts of Congress, these agencies—although they are privately held—provide public financial services. The primary purpose of GSEs is to enhance credit flow across various sectors like housing and agriculture.

For example, the [Federal Home Loan Mortgage Corp. (Freddie Mac)](https://www.investopedia.com/terms/f/freddiemac.asp) was created as a GSE in the housing sector. It was intended to encourage homeownership among the middle and working classes. Freddie Mac is considered a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) GSE.

Another example of a mortgage GSE is the [Federal National Mortgage Association (Fannie Mae)](https://www.investopedia.com/mortgage/fannie-mae-loans/). This entity was introduced to improve the flow of [credit](https://www.investopedia.com/terms/c/credit.asp) in the [housing market](https://www.investopedia.com/articles/personal-finance/033015/top-us-housing-market-indicators.asp) (while also reducing the cost of that credit).

In a broader economic context, GSEs play an integral role in the financial market's stability. For example, Freddie Mac increases mortgage credit availability to low to moderate-income families and underserved areas.

### Key Takeaways

*   Government-sponsored enterprises (GSEs) enhance credit flow to specific U.S. economic sectors like housing and agriculture.
*   GSEs like Fannie Mae and Freddie Mac purchase loans from lenders but don't lend directly to consumers.
*   These entities issue agency bonds, which offer higher yields than Treasury bonds due to greater credit risk.
*   Though privately held, GSEs have implicit government backing but are not government agencies.
*   GSEs played a critical role in stabilizing the economy during the 2008 subprime mortgage crisis.

## Understanding the Functioning of Government-Sponsored Enterprises

GSEs do not lend money to the public directly. Instead, they guarantee [third-party loans](https://www.investopedia.com/terms/i/indirect-loan.asp) and purchase [loans](https://www.investopedia.com/terms/l/loan.asp) 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](https://www.investopedia.com/terms/a/agencybonds.asp). How independent an agency bond issuer is from the federal government affects its [default risk](https://www.investopedia.com/terms/d/defaultrisk.asp). Most agency bond [investors](https://www.investopedia.com/terms/i/investor.asp) do not have to pay state and local taxes on their [interest](https://www.investopedia.com/terms/i/interest.asp) payments. Fannie Mae and Freddie Mac bonds are not exempt from these taxes.

GSE bonds have U.S. government support but are not fully guaranteed by it. Unlike Treasury bonds, they are not direct obligations of the government. For this reason, these securities offer a slightly higher [yield](https://www.investopedia.com/terms/y/yield.asp) than Treasury bonds, since they have a somewhat higher degree of [credit risk](https://www.investopedia.com/terms/c/creditrisk.asp) and default risk.

## Key Examples of Government-Sponsored Enterprises

The [Farm Credit System](https://www.investopedia.com/terms/f/farm-credit-system.asp) (FCS), the first GSE, was created in 1916 for farmers. It still exists as a network of federally approved, borrower-owned institutions that provide easy credit to farmers, ranchers, and agriculture-related companies.

The FCS receives its funding capital from the Federal Farm Credit Banks Funding Corporation, which sells [bonds](https://www.investopedia.com/terms/b/bond.asp) on securities markets. Another farming GSE, the [Federal Agricultural Mortgage Corporation (Farmer Mac)](https://www.investopedia.com/terms/f/farmermac.asp), was created in 1988. It guarantees the timely repayment of [principal](https://www.investopedia.com/terms/p/principal.asp) and interest to agricultural bond investors, purchases loans from lenders, provides financing for lenders and farmland investors, and issues long-term standby purchase commitments.

To stimulate the housing sector, in 1932, the government established the Federal Home Loan Bank (FHLB) system, which is owned by more than 6,500 community financial institutions. Fannie Mae, [Ginnie Mae](https://www.investopedia.com/ask/answers/ginnie-mae-security/), and Freddie Mac were chartered later, in 1938, 1968, and 1970, respectively. While similar in some ways, Ginnie Mae is not technically a GSE. The housing GSEs purchase mortgages from lenders on the [secondary mortgage markets](https://www.investopedia.com/terms/s/secondary_mortgage_market.asp). The proceeds from the sale are used by [lenders](https://www.investopedia.com/terms/l/lender.asp) to provide more credit to borrowers or mortgagors.

> **Fast Fact**
>
> Ginnie Mae is owned by the government and is part of the U.S. Department of Housing and Urban Development (HUD), unlike Fannie Mae. Therefore, it's not considered a GSE.

[Sallie Mae](https://www.investopedia.com/sallie-mae-student-loans-review-4800305) 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. Sallie Mae now offers [student loans](https://www.investopedia.com/terms/e/education-loan.asp) privately, along with advice on financing higher education and federal loan programs.

## Important Considerations for Government-Sponsored Enterprises

GSE loans in the secondary market are so large that GSEs are among the biggest financial institutions in the U.S. 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.

After the 2008 [subprime mortgage crisis](https://www.investopedia.com/terms/s/subprime-meltdown.asp), Fannie Mae and Freddie Mac received $187 billion in federal help. This large sum was intended to mitigate the negative impact that the wave of [defaults](https://www.investopedia.com/terms/d/default2.asp) was wreaking on the housing market and the national economy. They were also placed into government conservatorship. Both agencies have repaid their respective [bailouts](https://www.investopedia.com/terms/b/bailout.asp) since then, though they remain under the control of the [Federal Housing Finance Agency](https://www.investopedia.com/terms/f/fhfa.asp).

## What Is a Government-Sponsored Enterprise?

A government-sponsored enterprise (GSE) is an entity that Congress created to increase the flow of credit in certain areas of the U.S. economy, particularly real estate. GSEs differ from government agencies. The main difference is that GSEs are privately held organizations, while government agencies are run directly by the federal government.

## What Is an Example of a Government-Sponsored Enterprise (GSE)?

The Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac), and the Federal Home Loan Bank (FHLB) system are government-sponsored enterprises (GSEs) in the housing finance market. Sallie Mae (SLM) was a student loan GSE that is now a regular, private corporation. And the Farm Credit System (FCS) and the Federal Agricultural Mortgage Corp. (Farmer Mac) are agricultural GSEs.

## Is Freddie Mac a Government-Sponsored Enterprise?

Yes. Freddie Mac is a government-sponsored enterprise in the housing finance market. As a housing GSE, Freddie Mac is a “federally chartered, shareholder-owned, private company with a public mission to provide stability in and increase the liquidity of the residential mortgage market”. Freddie Mac also helps increase the availability of mortgage credit to low- and moderate-income families and in underserved areas.

## The Bottom Line

Entities established by Congress, the purpose of GSEs is to enhance credit flows and provide stability and liquidity in key sectors like housing, agriculture, and education. Examples of GSEs include Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system, all of which play a significant role in the housing finance market. While most GSEs are privately held, Ginnie Mae is a GSE that is government-owned and part of HUD.

GSEs do not directly lend funds to the public but instead support liquidity by purchasing loans and issuing bonds. While GSEs are not directly guaranteed, they carry a perception of safety due to the implicit government backing. The GSEs play a critical role during financial challenges, such as the 2008 subprime mortgage crisis, and their ongoing conservatorship by the Federal Housing Finance Agency.

As critical components in financial markets with significant influence, there are potential risks associated with GSEs. For example, the combination of their large size and implicit government guarantee can impact the broader financial market if they face distress.

_Correction—May 29, 2023:_ The latest version of this article has removed Ginnie Mae as an example of GSE.

> **Article Sources**
>
> 1.  Federal Housing Finance Agency. "[A Brief History of the Housing Government-Sponsored Enterprises](https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf)." Pages 3-4.
>     
> 2.  Federal Housing Finance Agency. "[A Brief History of the Housing Government-Sponsored Enterprises](https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf)." Page 2.
>     
> 3.  Charles Schwab. "[U.S. Agency Bonds: What You Should Know](https://www.schwab.com/learn/story/us-agency-bonds-what-you-should-know)."
>     
> 4.  Farm Credit Administration. “[History of FCA](https://www.fca.gov/about/history-of-fca).”
>     
> 5.  Federal Farm Credit Banks Funding Corporation. “[About Us](https://www.farmcreditfunding.com/ffcb_live/aboutUs/overview.html).”
>     
> 6.  Farm Credit Administration. “[About Farmer Mac](https://www.fca.gov/farmer-mac-oversight/about-farmer-mac).”
>     
> 7.  Federal Housing Finance Agency. “[Federal Home Loan Bank Membership Data](https://www.fhfa.gov/DataTools/Downloads/Pages/Federal-Home-Loan-Bank-Member-Data.aspx).”
>     
> 8.  Federal Housing Finance Agency. "[A Brief History of the Housing Government-Sponsored Enterprises](https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf)." Page 1.
>     
> 9.  Federal Housing Finance Agency. “[A Brief History of the Housing Government-Sponsored Enterprises](https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf).” Pages 2–3.
>     
> 10.  Federal Housing Finance Agency. "[A Brief History of the Housing Government-Sponsored Enterprises](https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf)." Page 3.
>      
> 11.  U.S. Department of the Treasury. "[Treasury Announces Successful Privatization of Sallie Mae](https://home.treasury.gov/news/press-releases/js2173)."
>      
> 12.  Congressional Budget Office. "[Fannie Mae, Freddie Mac, and the Future of the Secondary Mortgage Market](https://www.cbo.gov/publication/44042)."
>      
> 13.  Federal Housing Finance Agency. “[Conservatorship](https://www.fhfa.gov/Conservatorship).”
>      
> 14.  The White House. “[Government-Sponsored Enterprises](https://www.whitehouse.gov/wp-content/uploads/2021/05/gov_fy22.pdf).” Page 1378.