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Government-Sponsored Enterprise


A Government-Sponsored Enterprise (GSE) is a financial services corporation created by the United States Congress to enhance the flow of credit to specific sectors of the American economy. These corporations are privately owned but publicly chartered and enjoy certain financial benefits. They primarily operate in the secondary mortgage market, buying mortgages from lenders and packaging them into mortgage-backed securities for sale to investors.


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Key Takeaways

1. Public Purpose: Government-Sponsored Enterprises (GSEs) are financial services corporations created by the United States Congress to enhance the flow of credit to particular sectors of the economy that are considered underserved, such as housing, agriculture, and education.

2. Structure and Oversight: Although they are privately held corporations, GSEs are subjected to specific federal regulations and are overseen by a government agency. They are authorized to make loans and financial guarantees, often benefiting from advantageous borrowing terms due to the association with the government.

3. Risk and Controversy: GSEs represent a controversial aspect of public policy. On one hand, they help ensure that essential but underserved areas of the economy can access needed financing. On the other hand, because government agencies oversee them and they are associated with government backing, there is a risk to taxpayers if these institutions fail, as seen in the 2008 financial crisis when several prominent GSEs (Fannie Mae and Freddie Mac) required substantial government bailouts.


Government-Sponsored Enterprises (GSEs) play a significant role in the financial and housing sectors of the economy as they aim to enhance the accessibility and affordability of credit to specific sectors, such as housing, agriculture, and education. By providing financial services, like mortgages, to individuals and institutions that might otherwise struggle to secure them from private sector financial institutions, GSEs promote economic stability and growth. However, as they are created and backed by the government, they also pose a potential risk to taxpayers and can influence the level of risk in the financial sector. Therefore, their role and operations are critical understanding points in the broader picture of a country’s economic strategy and financial stability.


Government-Sponsored Enterprises (GSEs) are financial services corporations created by Congress to enhance the flow of credit to specific sectors of the economy. The primary purpose of GSEs is to improve the availability and affordability of credit to key areas of the economy, such as housing, agriculture, and education, which are considered crucial for the overall health and stability of the economy. These entities provide financial services that make much-needed credit available across the country and assist in building a resilient and vibrant financial system.GSEs can issue debt, essentially borrowing money from investors, and use those funds to finance loans to consumers and businesses. For example, GSEs such as Fannie Mae and Freddie Mac play a significant role in the U.S. mortgage market by buying mortgages from lenders, packaging them into securities, and then selling those securities to investors. This process allows banks and other financial institutions to free up capital and make more loans, thereby increasing the availability and affordability of home mortgages for consumers. Hence, the principal function of GSEs is to stimulate the credit market and ensure the liquidity necessary for it to function efficiently.


1. Fannie Mae (Federal National Mortgage Association): Established during the Great Depression, Fannie Mae is a U.S. Government-Sponsored Enterprise (GSE) intended to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities. This allows banks to reinvest their assets into lending and in effect increasing the number of lenders in the mortgage market.2. Freddie Mac (Federal Home Loan Mortgage Corporation): Similar to Fannie Mae, Freddie Mac is another GSE created by the U.S. government to buy and pool mortgages, convert them into mortgage-backed securities, and sell those securities to investors. The mission is to provide liquidity, stability, and affordability to the U.S. housing market.3. Farmer Mac (Federal Agricultural Mortgage Corporation): This GSE aims to increase the availability of long-term credit for agriculture by buying mortgages from agricultural lenders and selling them as securities to investors. This allows lenders to use the cash flow for additional loans, increasing funds available for agriculture and rural development.

Frequently Asked Questions(FAQ)

What is a Government-Sponsored Enterprise (GSE)?

A Government-Sponsored Enterprise (GSE) is a type of financial service corporation created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy.

Can you give examples of a Government-Sponsored Enterprise (GSE)?

Yes, the most well-known GSEs are the Federal National Mortgage Association, known as Fannie Mae, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, and the Federal Agricultural Mortgage Corporation, known as Farmer Mac.

Does a GSE operate under the government or independently?

GSEs are privately-owned corporations, but they have a public purpose determined by Congress. Therefore, they operate with both government oversight and independence for management and operation.

Who finances a GSE?

GSEs are financed through the issuing of debt securities and may also fund themselves by issuing shares. The presumption of government backing gives them the ability to borrow at relatively low-interest rates.

What purpose do GSEs serve?

The primary goal of GSEs is to increase the availability and affordability of credit to specific sectors of the economy, such as housing, agriculture, and education by reducing the risk to investors.

Are GSEs considered government agencies?

No, GSEs are not considered government agencies. They are private corporations chartered by the government with a public goal.

What is the relationship between GSE and the federal government?

The relationship is mainly supervisory. The federal government often sets forth performance goals and appoints some portion of the companies’ boards of directors, but the GSE operates independently on a day-to-day basis.

Are investments in a GSE risk-free?

No, investments in GSEs are not risk-free. While there is a widespread assumption that the government will step in if a GSE cannot meet its obligations, this is not guaranteed. In 2008, for example, Fannie Mae and Freddie Mac were placed into conservatorship due to their financial instability.

Related Finance Terms

  • Federal National Mortgage Association (Fannie Mae)
  • Federal Home Loan Mortgage Corporation (Freddie Mac)
  • Federal Agricultural Mortgage Corporation (Farmer Mac)
  • Securitization
  • Secondary Mortgage Market

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