Question

Why does the government sponsor agencies like Ginnie Mae, Fannie Mae, and Freddie Mac?

Answer 1

ANSWER:

Government Sponsored Entities

Freddie Mac, Fannie Man and Ginnie Mae were all government sponsored entities. The average person may not even know the meaning of these words. A government sponsored entity is a weird combination between a government entity and a corporate entity. Hence it is often known as a quasi-government entity.

This means that these agencies were created because a special legislation was passed by the US Congress for each of their creation. Therefore, they got a charter from the government. However, they are also publically listed corporations which trade on the market! Hence, they are both public and private at the same time which confuses a lot of people.

Government Control

Freddie Mac, Fannie Man and Ginnie Mae are also subject to a lot of control from the government. At least this was supposed to be theoretically the case. Some of the restrictions levied are as follows:

• The government has the authority to appoint five of the 18 board members in these coporations. Hence, theoretically, the management of these firms is controlled by the governments.
• Freddie Mac, Fannie Man and Ginnie Mae are not allowed to participate in the primary mortgage markets. This means that they cannot directly make any loans to the borrowers. They have to form the secondary mortgage markets leaving the task of loan origination to commercial and trust banks.
• Freddie Mac, Fannie Man and Ginnie Mae are also subject to limits which govern the maximum size of the mortgages that they buy. This size is linked to the housing price index. This is done to ensure that these quasi government agencies are actually buying the mortgages that help the lower and middle income groups rather than financing the wealthy households.
• These agencies are also subject to regulations which govern the quality of mortgages that they can purchase from the open market. The rules stated that Freddie Mac, Fannie Man and Ginnie Mae can only buy a mortgage if the borrower has put in at least 20% of the margin money or the mortgage is guaranteed by an external credit enhancement like insurance. However, later these rules were circumvented by these agencies.
• Freddie Mac, Fannie Man and Ginnie Mae are also subject to regulatory checks just like commercial and trust banks. These audits are conducted at periodic intervals.

It is for this reason that the bonds sold by these quasi government agencies were not listed either under government or private bonds. Rather, a special new section called “government sponsored agencies” was created to list them