GSE in Mortgage: Definition and Explanation

When looking to buy a property, there are plenty of daunting terms that you may encounter, and Government-Sponsored Enterprise (GSE) loans are among them. After all, government-backed financial products are as favorable as they are hard to get a hold of.

Still, GSE mortgage loans need not be feared. In fact, you are probably familiar with several government-sponsored enterprises, such as Fannie Mae and Freddie Mac. Agreements with these institutions often open doors that would otherwise be closed for most of the population.

How Mortgage GSEs Work

Government-sponsored enterprises are privately held Congress-chartered financial companies created to provide financial services and an additional source of credit to specific areas of the US economy. Most noticeably, they are used in real estate to help new homebuyers reduce their costs and gain approvals despite low credit scores.

GSE home mortgages have existed since 1932, when the Federal Home Loan Banks (FHLB) system was established. They are commonly used by agricultural businesses through agricultural GSEs and the education sector, e.g., through student loan GSEs. Interestingly, the Federal Farm Credit System Corporation was established even earlier, in 1916.

Mortgage GSEs do not actually give out loans, as companies like Fannie Mae and Freddie Mac cannot issue mortgages themselves. This can only be done by traditional lenders, i.e., banks; GSEs then approve lenders to give out government-backed loans.

GSEs can guarantee installment loans, enabling banks to approve principal mortgage loans with less strict requirements. For the borrower, this can mean:

• Getting approved despite a low credit score
• Improving your borrowing limit
• Lower interest rates

GSE mortgage loans reduce risks for mortgage lenders, which means they can accept more applications. In turn, the increased volume of real estate purchases boosts the economy.

As a borrower, you can apply for a GSE mortgage loan as a single or joint applicant, which is good news for couples. GSEs support folks hoping to buy houses, apartments, and all traditional property types.

Why Are GSE in Mortgage Agreements Useful?

GSEs are a crucial feature of the economy, not least in the real estate arena. As well as the direct beneficiaries of borrowers and lenders, their influence indirectly supports homeowners and sellers that do not need GSEs, by bringing liquidity and stability to the market.

Without these favorable loans, fewer applicants would be accepted, or they wouldn’t be able to make their payments. In turn, the reduced demand would make it harder for sellers to find prospective buyers, while a dip in the market would cause interest rates to climb. Therefore, GSE mortgages serve the best interests of several parties in several ways:

• Maintaining the flow of property sales and transactions
• Keeping interest rates at an affordable level
• Ensuring housing prices grow above the rate of inflation
• Helping new buyers get onto the property ladder

They have been a valuable tool for almost a century and are perhaps more widely relevant than ever.

GSE Bonds vs. Treasury Bonds

When applying for a mortgage, several terms may (wrongly) be used interchangeably. As such, understanding the differences between a GSE bond and a Treasury bond can be very useful. The information is also beneficial for investors hoping to purchase bonds.

GSE bonds are a form of agency bond, also known as agency debt. It is a security issued by a GSE, but it’s not a government bond, like those you can purchase from the US Treasury.

Because this type of bond is held by a private company, they do not have as much backing as Treasury bonds, although some examples may still require government oversight. Most GSE bonds are exempt from state taxes and pay a semi-annual fixed coupon. Like Treasury bonds, they have interest-rate risks.

Conversely, a Treasury bond is one of the four types of debt the US Treasury utilizes. They finance the government’s spending and offer interest payments semi-annually as federally taxed income. Investors commonly use them as a low-risk or even risk-free way to support their retirement savings. Investors are additionally obligated to hold them for at least 45 days.

In Conclusion

The answer to: “What is a Government-Sponsored Enterprise?” is probably a lot simpler than you thought. It’s essentially a financial company backed by the government that can guarantee your loan agreement, thus leading to an increased chance of acceptance when approaching the bank.

Not every mortgage applicant or prospective homebuyer needs a GSE mortgage. But those that do may find that it helps them get on the ladder far quicker.