Government Sponsored Enterprise or GSE is something you probably never heard of before the mortgage meltdown. However, they have been around for some time.

Government Sponsored Enterprise - GSE Definition

In the mortgage world government sponsored enterprises usually refers to Fannie Mae and Freddie Mac. These two stock exchange private corporations were created by Congress to improve the liquidity of the mortgage market.

If banks only have a certain amount of money to lend, you may apply for a mortgage and be turned down because the bank just does not have the money to fund your mortgage.

And that is the way it used to be before the GSEs. They give the banks the ability to sell these mortgages to make room for more. Which means more people get mortgages and the money keeps moving.

These two mortgage GSEs (Fannie Mae and Freddie Mac) set national underwriting standards for mortgages. If Fannie or Freddie says a mortgage is approved under their underwriting standards, then they insure the mortgage.

They approve mortgages through an automating underwriting system they developed. If the mortgage is approved using their automated underwriting, they believe the risk of default is low which is why they can provide insurance for them.

Then, Wall Street takes bundles or pools of mortgages and sells them to large investors like insurance companies, foreign banks, etc. A bundle or pool is a group of mortgage with similar rates, loan to value, type of loan, etc.

GSEs insurance is not directly back by the full faith of the U.S. Government but many believe they are.

For this reason, these pools of mortgages, once securitized, offer investors a better return than Treasuries.

In recent years, the amount of GSE securitized debt

(over $5 Trillion in total!)

owned around the world has skyrocketed with Japan, China, and Middle Eastern nations owning a large portion. This is one of the prime reasons we are the world’s leading debtor nation.

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