Government Sponsored Enterprise Securities and Their Impact

Government Sponsored Enterprise Securities have a significant impact on the US economy. They are created by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.

These GSEs were established to improve the affordability of housing. They do this by buying and securitizing mortgages, which allows them to provide liquidity to the mortgage market.

GSE securities are backed by the full faith and credit of the US government. This makes them a very attractive investment for many investors.

The total value of outstanding GSE securities is over $5 trillion.

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Government-sponsored enterprises (GSEs) issue a variety of securities to support the economy. Agency securities are a type of security issued by these GSEs or other federal government agencies.

Agency securities are issued in the form of bonds, which can be sold in various increments. The minimum investment level for some agency securities is $10,000 for the first increment, with $5,000 increments thereafter.

Some agency bonds have fixed coupon rates, while others have floating rates that adjust to the movement of a benchmark rate, such as the London Interbank Offered Rate (LIBOR). This means that the interest rate paid on these bonds can change periodically.

Agency securities can be categorized into different types based on their characteristics. Here are some examples:

These categories demonstrate the diversity of agency securities and the different characteristics that investors should consider when evaluating these securities.

GSEs are regulated by the Federal Reserve, the Federal Housing Finance Agency, and the Securities and Exchange Commission.

The government's role in regulating GSEs is to ensure their financial stability and accountability.

GSEs must meet capital requirements and adhere to strict risk management standards to mitigate potential losses.

GSEs set the standards for mortgages to meet by purchasing a specific type and number of loans. This helps dictate the down payment, credit score, and debt-to-income ratio lenders use to qualify borrowers.

GSEs are major buyers in the market, which gives them the power to set conforming guidelines.

By setting conforming guidelines, GSEs help lenders determine the qualifications for conforming loans.

GSEs set maximum loan lending limits based on geographical location and property type.

The Implicit Guarantee is a crucial aspect of GSE regulation. It essentially means that the US government implicitly guarantees the debt of Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac.

This guarantee was a key factor in the GSEs' ability to attract investors and maintain their credit ratings. The implicit guarantee was not explicitly stated, but it was widely understood.

The implicit guarantee was a major factor in the GSEs' ability to grow and become a dominant force in the mortgage market. It allowed them to issue large amounts of debt at low interest rates.

However, the implicit guarantee also created a moral hazard problem, as it encouraged the GSEs to take on excessive risk in pursuit of higher returns. This ultimately contributed to the financial crisis of 2008.

The implicit guarantee was also seen as a form of subsidy to the GSEs, as it allowed them to borrow at lower rates than they would have been able to on the open market.

The Federal Home Loan Banks were established in 1932 under the Federal Home Loan Bank System, an 11-bank consortium across the U.S. These banks cover major cities such as Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka.

Fannie Mae was founded in 1938 to facilitate capital flow into the housing market through its mortgage purchases from lenders, and it also guarantees and issues mortgage-backed securities.

Freddie Mac was chartered in 1970 to support the U.S. housing finance system, and it operates in the secondary mortgage market, mainly buying mortgages from smaller and rural banks.

Ginnie Mae was founded in 1968 to guarantee government-backed loans, specifically FHA and VA loans, which allow home buyers with lower credit scores or past credit issues to buy homes with 3.5% down or 0% down, respectively.

Here are some of the most common GSEs:

Government sponsored enterprise securities have a long and complex history. The concept of government sponsorship dates back to the Great Depression, when the government created the Federal Home Loan Bank Board to provide liquidity to the housing market.

The Federal National Mortgage Association (Fannie Mae) was established in 1938 to purchase mortgages from banks and other lenders, thereby freeing up capital for new loans. This helped to stabilize the housing market and provide affordable housing options for low- and moderate-income families.

The housing market crisis of 2007-2008 was a major turning point for government sponsored enterprises. The crisis was triggered by a housing bubble that burst, causing a sharp decline in housing prices and a subsequent increase in foreclosures.

A unique perspective: Government Housing Loan Programs

The early decades of the crisis were marked by a severe economic downturn, with GDP shrinking by 25% between 1929 and 1932. This led to widespread poverty and unemployment.

The crisis was exacerbated by a massive bank run in 1931, which saw depositors withdraw their funds, leaving many banks insolvent. This led to a credit crunch, making it difficult for businesses to access capital.

The US government's initial response to the crisis was limited, with President Hoover advocating for voluntary measures to stimulate economic growth. However, these efforts were ineffective in addressing the scale of the crisis.

The crisis had a disproportionate impact on rural areas, where agricultural prices plummeted, leaving many farmers struggling to make ends meet. The Dust Bowl, a period of severe drought and dust storms, further exacerbated the suffering of rural communities.

The 2007 Crisis was a global economic downturn that started in the United States and quickly spread to other countries.

It was triggered by a housing market bubble bursting in the US, causing a massive decline in housing prices and a subsequent freeze in the subprime mortgage market.

The crisis led to a global credit crunch, with banks and other financial institutions reducing lending to avoid taking on more risk.

Home prices in the US fell by over 30% between 2006 and 2009, leaving many homeowners with mortgages that exceeded the value of their homes.

The crisis had far-reaching consequences, including widespread job losses, a sharp decline in consumer spending, and a significant increase in debt defaults.

The US government responded to the crisis by passing the Troubled Asset Relief Program (TARP), which provided $426 billion in bailout funds to struggling banks.

The crisis led to a significant increase in government debt, with the US national debt rising from $9.3 trillion in 2007 to $12.3 trillion in 2009.

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In 2010, Fannie Mae and Freddie Mac's stocks were delisted from the NYSE. This decision was made after Fannie's stock traded below $1 a share for over 30 days.

The Federal Housing Finance Agency directed the delisting, which was a significant move in the history of these two companies.

Fannie Mae makes money by borrowing at low rates and reinvesting its borrowings into whole mortgage loans and mortgage-backed securities.

It purchases whole loans and then securitizes them for the investment market by creating MBS that are either retained or sold. This process allows Fannie Mae to earn a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on mortgage loans.

Fannie Mae's charter has historically prevented it from guaranteeing loans with a loan-to-values over 80% without mortgage insurance or a repurchase agreement with the lender. However, in 2006 and 2007, Fannie Mae did purchase subprime and Alt-A loans as investments.

Fannie Mae's mortgage portfolio was in excess of $700 billion by August 2008, which is equivalent to $972,800,000,000 in 2023. This large portfolio is a result of Fannie Mae's ability to borrow very inexpensively in the debt markets.

Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults is a key aspect of its business model. This guarantee is a major reason why investors are willing to purchase Fannie Mae MBSs.

Here are some key statistics about Fannie Mae's business:

By purchasing mortgages and securitizing them, Fannie Mae provides banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.

Government Sponsored Enterprise (GSE) securities are a crucial part of the mortgage market. Fannie Mae and Freddie Mac, the two largest GSEs, bundle and securitize mortgage loans into packages called mortgage-backed securities (MBSs).

These MBSs are highly liquid and attractive to investors, with an estimated $11 trillion in securities outstanding and an average trading volume of $300 billion daily. Depository institutions, the Federal Reserve, and international investors are among the biggest buyers of these GSE bonds.

Investors can purchase individual MBSs through a broker or through exchange-traded funds (ETFs) or mutual funds. Typically, MBS issues offer higher yields than U.S. Treasury bonds, making them a popular choice for investors.

The demand for non-conforming loans is lower due to the law of supply and demand, making these loans more expensive for borrowers, often priced 1/4 to 1/2 of a percent higher than conforming loans.

Lenders typically issue conforming loans because they can quickly sell them to GSEs and free up capital to originate more loans.

Conforming loans follow strict guidelines set by GSEs, which dictate the down payment, credit score, and debt-to-income ratio lenders use to qualify borrowers.

Loans that don't meet GSE criteria are called nonconforming or jumbo loans and usually have higher down payment and credit requirements.

Because nonconforming loans pose a higher risk to lenders, they often have stricter qualification standards.

GSEs set the standards for conforming loans, which helps dictate the requirements for borrowers to qualify for these loans.

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Agency securities are a type of security issued by government-sponsored enterprises (GSEs) to reduce borrowing costs for specific sectors of the economy.

Fannie Mae, a GSE, issues agency securities in the form of bonds to guarantee the timely repayment of principal and interest to investors. This helps improve the flow of credit in the housing economy.

GSEs like Fannie Mae and Freddie Mac only buy conforming loans, which have a limit set by the Office of Federal Housing Enterprise Oversight (OFHEO). This limit is based on the October to October changes in mean home price.

The conforming loan limit is 50 percent higher in Alaska and Hawaii, and GSEs only buy loans that meet these limits to repack into the secondary market.

Non-conforming loans, which are larger than the conforming loan limit, tend to cost more to borrowers, typically 1/4 to 1/2 of a percent.

GSEs help regulate the mortgage market by purchasing specific types and numbers of loans, setting standards for down payment, credit score, and debt-to-income ratio.

Mortgage-backed securities (MBSs) are packages of mortgage loans that GSEs bundle and securitize, allowing investors to buy individual securities or through exchange-traded funds (ETFs) or mutual funds.

The MBS market is estimated at over $11 trillion in securities outstanding, with an average trading volume of close to $300 billion daily.

Some government-sponsored enterprises (GSEs) are no longer funded or managed by the federal government, but their core function remains the same.

These former GSEs include the Federal Home Loan Banks (FHLB), which was founded in 1932 to provide home loans during the Great Depression. FHLB is now a network of 11 regional banking cooperatives that fund over 6,500 banks, credit unions, insurance companies, and community development financial institutions.

Sallie Mae, or the Student Loan Marketing Association, was previously a GSE that serviced student loans on behalf of the Department of Education. Since 2004, it has focused on servicing private student loans as a private company.

The Farm Credit System, created in 1916, is a network of cooperating lenders and associations that provides capital to farmers, ranchers, agricultural producers, rural infrastructure providers, and rural home buyers across the nation.

Here's a brief overview of these former GSEs:

The Federal Reserve has conducted three rounds of asset purchases that included purchases of securities of the housing GSEs, with the first round resulting in the purchase of $1.250 trillion of MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

The Federal Reserve announced the second round of purchases through the reinvesting of principal payments from its holdings of GSE and Ginnie Mae securities in GSE and Ginnie Mae MBS, and later announced it would purchase additional agency MBS at a pace of $40 billion per month.

The total amount of MBS purchased by the Federal Reserve in the second round is not specified in the article, but it's worth noting that the Federal Reserve has a history of making significant investments in the housing market to support economic recovery.

Data as of 9/30/19 is a snapshot of the activities by the Department of the Treasury and the Federal Reserve System to support mortgage markets.

The data is based on a specific point in time, September 30, 2019, and does not reflect any updates that may have occurred after that date.

The tables that follow provide data on draws by Fannie Mae and Freddie Mac on commitments made by the Treasury in senior preferred stock purchase agreements.

These agreements were made to support mortgage markets, and the data shows the quarterly draws on Treasury commitments.

The data includes information on Treasury purchases of mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac.

The Federal Reserve has conducted three rounds of asset purchases, including purchases of securities of the housing GSEs.

Here's a summary of the Federal Reserve's purchase activities:

The data also includes information on dividends paid by Fannie Mae and Freddie Mac to Treasury on the senior preferred stock.

The data is provided in PDF format, which makes it easy to access and view.

The data is a valuable resource for understanding the activities of the Department of the Treasury and the Federal Reserve System in supporting mortgage markets.

In 2011, the U.S. Securities and Exchange Commission charged six Fannie Mae and Freddie Mac executives with securities fraud.

These executives, including Daniel Mudd, were accused of making misleading statements about the companies' exposure to subprime loans.

Daniel Mudd's misconduct included knowingly giving false testimony to Congress.

Former Freddie chief financial officer Anthony "Buddy" Piszel received a notice from the SEC that the agency was considering taking action against him, prompting his resignation from CoreLogic.

David Kellermann, who succeeded Piszel at Freddie, committed suicide during his tenure.

The SEC's allegations against Mudd and the other executives were significant, as they claimed the companies had minimal exposure to subprime loans at the height of the home mortgage bubble.