Question

What role do GSEs play in creating, facilitating, and sustaining residential home ownership? In your opinion, where would the level of home ownership be without these organizations? Are there any types of agency conflict in the use of these enterprises?

Answer 1

What Is a Government-Sponsored Enterprise?

A government-sponsored enterprise is a quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy.

Roles of GSEs

• Created by acts of Congress, these agencies, though privately held, provide public financial services. GSEs help to facilitate borrowing for all sorts of individuals, from students to farmers to homeowners.

• For example, the agency Federal Home Loan Mortgage Corporation (Freddie Mac) was originally created as a GSE in the housing sector to encourage homeownership among the middle class and working class. Other mortgages GSEs, as they are called, include Federal National Mortgage Association (Fannie Mae) and Government National Mortgage Association (Ginnie Mae), which were introduced to improve the flow of credit in the housing market, while also reducing the cost of that credit.

• How a Government-Sponsored Enterprise Works ,Government-sponsored enterprises do not lend money to the public directly. Instead, they guarantee third-party loans and purchase loans 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. The degree to which an agency bond issuer is considered independent of the federal government impacts the level of its default risk. Bond investors holding most but not all types of agency bonds have their interest payments exempt from state and local taxes.

• Although GSE bonds carry the implicit backing of the U.S. government, they are not direct obligations of it, unlike Treasury bonds. For this reason, these securities will offer a slightly higher yield than Treasuries, since they have somewhat if slightly, higher credit risk and default risk.

Agency Conflict:

• Treasury Reponsibilities
• Bond Management
• Regulation structure