Government-Sponsored Enterprises: An Overview

Freddie Mac and Fannie Mae are quasi-governmental agencies that were originally established to help you accomplish your financial goals.

Brainstorm on America's most famous families, and your list might include the Hiltons, the Jacksons, and the Kennedys. But none of these have been as influential on the modern American lifestyle as the Maes-that is, Fannie and Ginnie Mae, and their cousin, Freddie Mac.

Welcome to Ginnie Mae

It's a common misconception that Fannie Mae and Freddie Mac are federally funded, or federally managed, organizations. Fannie and Freddie are actually government-sponsored enterprises (GSEs)-private corporations that were originally chartered by the federal government to fulfill a public purpose. Fannie and Freddie's purpose is to shore up the mortgage industry with a steady source of liquidity.

Congress established Fannie Mae, officially known as the Federal National Mortgage Association, in 1938. As part of President Roosevelt's New Deal, Fannie Mae was tasked with reviving a stagnant U.S. housing market by allowing banks to fund cheap mortgage loans. Fannie was a government agency back then, and used that federal backing to its advantage; it raised mortgage seed money by borrowing from foreign investors at low rates. Investors accepted those low rates because the investment, backed by the U.S. government, was virtually risk free. The mortgage loans made to borrowers would then carry a higher rate, allowing for the banks and Fannie to turn a profit.

Fannie's activities evolved into the development of the secondary mortgage market, which today is an essential component of the industry.

In 1968, Fannie was privatized and converted into financial self-sufficiency. Two years later, Congress created Freddie Mac, a.k.a. the Federal Home Loan Mortgage Corporation (FHLMC). Like Fannie Mae, Freddie Mac also participates in the secondary mortgage market, bundling mortgage loans and selling them off in shares to institutional investors. Since these entities are now independent from the feds, the U.S. government doesn't guarantee the mortgage-backed securities that they issue. As GSEs, though, Fannie and Freddie enjoy some special perks-both are exempt from taxes and regulatory oversight.

Fannie Mae and Freddie Mac are now the dominant players in the secondary market for mortgages in the U.S. If you've ever had, or ever will have a mortgage loan, there's a good chance Fannie or Freddie was, or will be, involved.

A family affair

To confuse the family tree further, Ginnie Mae is actually a federal entity. It's a spin-off from Fannie Mae, and was created when Fannie was privatized in 1968. Officially known as the Government National Mortgage Association (GNMA), Ginnie also participates in the secondary mortgage market by guaranteeing mortgage-backed securities. Ginnie-guaranteed issues are the only ones that are explicitly backed by the U.S. government.

The Mae family's adventures may not be interesting enough for the world of entertainment or reality TV, but they've positively touched the lives of millions.