Where do Mortgages come from

A government sponsored enterprise (GSE) is a federally chartered entity subject to specific government mandated purposes. GSEs existed throughout much of the twentieth century and continue to in the twenty first century to facilitate liquidity within financial markets such as the secondary mortgage market. Over time, numerous legislative acts have impacted the regulation and structure of GSEs. For example, in 1968, the Charter Act created a company called Ginnie Mae by splitting Fannie Mae in two.

According to the Library of Congress, Congressional Research Service, financial limitations on GSEs are set forth in the Omnibus Reconciliation Act of 1990. Moreover, this act specifically sets forth a financial obligation for GSEs to facilitate credit and lending in addition to private ownership.  Prior to this act however, GSEs were not necessarily privately owned. Freddie Mac became public in 1989 via the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. In 2008 government intervention saved both Fannie Mae and Freddie Mac from financial collapse.

Government sponsored enterprises such as Fannie Mae have been overseen by a conservator and board of directors since 2008. In the case of Fannie Mae, the conservator is the Federal Housing Finance Agency (FHFA). A Chief Executive Officer (CEO) is appointed to a board and works with company executives to manage the GSE.  Despite their corporate reforming, both Freddie Mac and Fannie Mae retain the purpose of mortgage market making i.e. smoothing the progress of mortgage loan products as an intermediary between secondary mortgage markets and federally insured mortgage loans.

The Library of Congress, Congressional Research Service distinguishes the difference between GSEs and government agencies by defining its management structure. Management of a GSE is not required to implement policy directly requested by the legislative or executive branch of government. In other words, even though government authorizes the GSEs structure and form, the actions carried out by the company only have to fulfill key charter objectives rather than operational characteristics. This has traditionally allowed mortgage GSEs to function with more sensitivity to mortgage market trends, and requirements.

The United States General Accounting Office (GAO) was able to identify weaknesses within the form of GSEs before their shortcomings in the late 2000’s. Specifically, the GAO pointed out obscure procedures regarding the function of GSEs led to a potential lack of accountability by the GSEs to government, performance monitoring organizations, and the public. A conflict of interest between Federal Charter and private interest may have had much to do with this particular weakness, however, clearer regulations regarding the allowances of the private organizations may have prevented the abuse or succumbing of GSEs to such structural deficit.

Sources: (Date of record, November 16, 2010)

1. http://bit.ly/dvVMrq (Congressional Research Service)
2. http://bit.ly/akTBcZ (U.S. General Accounting Office)
3. http://bit.ly/bCCrL6 (Fannie Mae)