Conventional Financing

A government-sponsored enterprise (GSE) is a financial services corporation created by the U.S. government. Fannie Mae and Freddie Mac are the two largest GSEs and the ones that most people know. The purposes of a GSE is to encourage lending and enhance the flow of credit by reducing the risk to investors. Here’s a very basic, over-simplified example of the role a GSE (in this case Fannie Mae) plays in the mortgage industry:

  • Joe Buyer buys a house and wisely uses Mortgage Mark with HomeBridge Financial Services to get his $300,000 loan.
  • When Joe closes his loan, HomeBridge provides the $300,000 to fund Joe’s purchase.
  • HomeBridge then securitizes Joe’s loan and sells it to Fannie Mae.
  • Fannie then provides HomeBridge $300,000 for this loan; this allows HomeBridge to re-use that $300,000 for a brand-new mortgage being made to Sally Refinancer.
  • After Joe’s loan is sold to Fannie, HomeBridge retains the servicing rights to this loan and is known as the “Mortgage Servicer.” This means that Joe will make his monthly payment to HomeBridge even though Fannie technically owns the loan.

Fannie Mae

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a Government-Sponsored Enterprise (GSE). That basically means that Fannie Mae (like Freddie Mac) is a quasi-government corporation. While Fannie Mae is a publicly traded company, it was originally formed by the U.S. government in 1938 during the Great Depression as part of the New Deal. Fannie’s purposes is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS). This allows lenders to reinvest their assets into more lending and in effect increase the number of lenders in the mortgage market by reducing the reliance on banks and thrifts.

Freddie Mac

The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a Government-Sponsored Enterprise (GSE). That basically means that Freddie Mac is a quasi-government corporation and the younger brother to Fannie Mae. Freddie was established as a private corporation thorugh the Emergency Home Finance Act of 1970. Freddie’s charter is the same as Fannie’s: to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS). This allows lenders to reinvest their assets into more lending and in effect increase the number of lenders in the mortgage market by reducing the reliance on banks and thrifts.