Government-Sponsored Enterprises (GSEs) are private corporations that operate in the financial services industry with Congressional charters. They play a vital role in the U.S. housing finance system. The primary mortgage market GSEs include Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).
GSEs have a unique mission to provide liquidity, stability, and affordability to the mortgage market. They buy mortgages from lenders, ensuring lenders have the necessary funds to issue new loans. GSEs either hold these mortgages or package them into mortgage-backed securities (MBS), which they sell to investors. This process is crucial for the free flow of investment capital into the housing market, significantly affecting the availability and cost of housing.
GSEs focus on buying "conforming" loans, which meet specific guidelines set by them. These guidelines include loan limits, borrower's credit score, loan-to-value ratio, and underwriting criteria. For 2021, the conforming loan limit for single-family homes is $548,250 in most areas and up to $822,375 in high-cost areas.
By creating a secondary market for mortgages, GSEs help to make housing more affordable and accessible. Their role became particularly prominent in the wake of the 2008 financial crisis, highlighting the importance of their stability for the overall health of the real estate market.
Following the 2008 financial crisis, GSEs came under the conservatorship of the Federal Housing Finance Agency (FHFA). This move aimed to reduce their risk exposure and ensure they focus on their public mission over profit motives. The conservatorship involves close regulatory scrutiny, ensuring that GSEs operate in a safe and sound manner, supporting housing finance and protecting taxpayers.
The role of GSEs in the U.S. mortgage market is multifaceted and indispensable. Their operations contribute significantly to the liquidity and stability of the housing market, making homeownership attainable for millions of Americans.