Overview

Congress has created a number of Government Sponsored Enterprises (GSEs) over the years to close perceived gaps in our nation's capital markets for housing and agriculture. Generally speaking, the GSEs are wholesale lenders, except for the Farm Credit System which is a retail lender to rural America. (Click here for further details.)

These GSEs have become major competitors with private lenders in their primary role as credit wholesalers, and propose to become even more so through "mission creep." They have expanded into, or are considering expanding into, other services to further their charter functions. Non-government competitors argue that GSEs are afforded an unfair competitive advantage due to the implicit Federal backing. GSEs can issue debt at near-Treasury interest rates because the debt has an implicit federal guarantee. Moreover, the Treasury Department and some members of Congress believe that GSEs are using their federal agency status to borrow cheap money and invest it in non-mission related projects.

Housing GSEs

GSE funding to the housing market takes two forms: (1) front-end funding through advances from the Federal Home Loan Banks (FHL Banks); and (2) back-end funding through purchase of mortgages by Fannie Mae and Freddie Mac. While these delivery mechanisms remain in place, increased competition in the mortgage market, shareholder demands, and increased government scrutiny of how the GSEs operate are causing GSEs to re-examine their products, operations and business plans. Moreover, in relation to the FHL Banks, Congress has taken action to expand the scope of benefits that this GSE provides to community banks.

Federal Home Loan Banks

The Federal Home Loan Bank System consists of twelve regional banks which provide loans ("advances") to commercial banks, thrifts and other System members. Commercial banks now make up a majority of System members, although a significant amount of System advances go to large thrifts. While most commercial banks join the System in order to borrow funds, many find the dividends paid on FHL Bank stock attractive.

Questions? Please contact Joe Pigg for more information.