The term ‘government-sponsored enterprises’ (GSEs) refers to three US organisations – Freddie Mac, Fannie Mae and Ginnie Mae – which all play a crucial role in the US mortgage market.
Rather than lend direct to homeowners, a GSE usually buys or guarantees existing mortgages issued by US retail banks. This frees up capital for the issuing bank, enabling it to create more mortgages at lower interest rates than would otherwise be possible. This is because a GSE can raise capital cheaply, thanks to the implied backing it gets from the US government.
Unfortunately, from 2005 GSEs began buying or underwriting higher-risk mortgages issued to less credit-worthy borrowers, which has triggered substantial losses on the back of widespread defaults.