A government-sponsored enterprise or GSE is a company authorized by federal legislation and backed by the U.S. government. In spite of this government sponsorship, GSEs are private businesses with private shareholders. Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) are the most well-known GSEs and own a majority of U.S. mortgages. A government-sponsored-enterprise mortgage is a mortgage owned by a GSE.
When you purchase a home, if that home is not expensive enough to require a jumbo loan, and if you are getting a conventional mortgage, you may be offered what’s called a conforming loan. If your credit is good enough, you certainly will be.
Why? Because your lender can sell this type of loan to Fannie Mae or Freddie Mac, government-sponsored enterprises (GSEs) that buy loans and turn them into mortgage-backed securities. This makes the loans less risky for the lender. When your loan originator (original lender) sells your conforming loan to a GSE, that loan becomes a government-sponsored-enterprise mortgage.
What is a government-sponsored enterprise mortgage?
A government-sponsored-enterprise mortgage is a home loan owned by a government-sponsored enterprise or GSE. Home loans turn into GSE mortgages when loan originators, the lenders you dealt with, sell conforming loans to Fannie Mae or Freddie Mac. Though you’ll never be offered a GSE mortgage when shopping for a home loan, chances are good that any non-government, non-jumbo mortgage loan you get will turn into a GSE mortgage after you buy your home.
GSE mortgages and conventional loans
Conventional loans are loans not guaranteed or insured by government agencies. Government agencies that directly back loans include, but are not limited to, Ginnie Mae (the Government National Mortgage Association), the FHA (Federal Housing Administration), and the VA (Veterans Administration).
If you’re eligible for any loan directly backed by the government, it may be the best mortgage you can get. This will be especially true if you lack the superior credit needed for a conventional loan. If your credit is excellent, however, a conforming conventional loan should offer you good value because it’s destined to become a GSE mortgage.
Though a conforming loan is not guaranteed or insured by the U.S. government, meaning it isn’t officially “government-backed,” it is exactly that for all practical purposes. Because government backing makes it less risky for lenders, this type of loan will usually offer you a lower interest rate or APR.
GSEs and GSE mortgages: less confusing than you think
Buying a home can be exciting. It can also be stressful and time-consuming. That’s why it’s so important to find a mortgage loan that fits your financial situation and gets you the best value.
The housing market, home financing, and the mortgage industry feature concepts, complications, and terminology that those of us who are not mortgage lenders, real estate brokers, or attorneys can find confusing or wholly inscrutable. Among the things that can confuse us the first time we hear them are references to “GSE mortgages,” “government-sponsored enterprises,” and “housing GSEs.”
As already noted, a GSE is a privately owned entity authorized and backed by the U.S. government. Since the U.S. federal government is supposed to promote the general welfare rather than the specific interests of certain groups, we should expect that GSEs will somehow provide value to the American populace broadly speaking. To see if these privileged private companies really do promote the general welfare, we should look at actual GSEs and see what they do.
What are examples of GSEs?
The Federal Home Loan Bank System (FHLBS) is a GSE, or a group of GSEs. Like the Federal Reserve, the FHLBS comprises multiple banks. But people are seldom thinking about the FHLBS when they refer to GSEs.
When people talk about GSEs and GSE mortgages, they usually have Fannie Mae and Freddie Mac in mind. It is these GSEs that this article will focus on. Both of them purchase conforming mortgages originated by private lenders. Freddie Mae specializes in mortgages originated by larger banks. Freddie Mac focuses on mortgages from credit unions and smaller banks.
What are Fannie Mae and Freddie Mac and how do they benefit borrowers?
The Federal Housing Finance Agency (FHFA) oversees government agencies and GSEs that provide or insure home financing. This makes it a key source of information about Fannie Mae and Freddie Mac. After noting that these GSEs were established by Congress, FHFA summarizes their benefits as follows:
Fannie Mae and Freddie Mac….perform an important role in the nation’s housing finance system — to provide liquidity, stability and affordability to the mortgage market. They provide…ready access to funds on reasonable terms…to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing….Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold….”
Further, the FHFA adds,
By packaging mortgages into MBS and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract…investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing….Fannie Mae and Freddie Mac also can help stabilize mortgage markets and protect housing…when stress or turmoil in the broader financial system threaten[s] the economy.”
Whether your political convictions incline you to trust or doubt this list of benefits, one thing is beyond dispute, GSE mortgages will usually have better rates and terms. So, if you can qualify for one, it is probably your best option. .
Usually doesn’t mean always
As it happens, at the time this article is being written, in the first quarter of 2022, jumbo loans have better rates on average than the conforming loans that turn into GSE mortgages, which is highly unusual.
We don’t expect this situation to last. But if there was ever a time to consider a jumbo loan, Q1 of 2022 is (or was) that time. At almost all other times, and perhaps already as you read this article, mortgages that can turn into GSE loans, aka conforming mortgages, will provide better value than nonconforming alternatives.
When you say a GSE mortgage provides better value, what does that mean?
Just how much better can you expect a GSE mortgage to be than a nonconforming loan? As it happens, this is a matter of debate. The FHFA certainly thinks Fannie Mae and Freddie Mac provide good value to American homebuyers.
A 2016 Heritage Foundation report, however, isn’t so impressed. The report discusses federal housing finance enterprises or FHFEs. FHFEs include, but are not limited to, the GSEs. In addition to the GSEs, FHFEs include all the government agencies involved in home financing, from the FHA to Ginnie Mae and beyond. Here’s that report’s conclusion about the value of FHFEs to mortgage borrowers:
As for any benefits, the FHFEs appear to have done little more than provide borrowers with minimally lower interest rates on home loans. Economic research suggests that the benefit to borrowers is likely only on the order of 10 basis points (0.10 percentage points) in lower interest rates on mortgage loans, and that shareholders and management of the FHFEs are likely to retain the majority of the benefits conferred by the taxpayer-financed subsidies.”
Whom should you believe, the Heritage Foundation or the FHFA? Well, 0.10% of $250,000 is only $250 dollars. That doesn’t seem like big savings per year when financing a home for a quarter-million dollars. But this lumps together loan programs with different primary benefits. For instance, the biggest benefit of FHA and VA loans is that homebuyers who can’t qualify for conventional loans may be able to get them. Some of these loans also offer down payment assistance, a benefit highly valued by borrowers who qualify.
Only actual mortgage offers can tell you where the best value for you lies
The bottom line is that you need to consider more than just the interest rate or APR when shopping around for the right home loan. Which loan will end up offering the best overall value in your case depends on your unique circumstances. Policy debates and statistics, while interesting, won’t tell you much about which home purchase mortgage is best for you or how much one program will save you over another.
How do GSE mortgage loans work?
The key point is that you will never be offered a GSE mortgage. Why not? Simply put, loan originators don’t offer GSE mortgages. What they offer are conforming mortgages that will become GSE mortgages via purchase on the secondary mortgage market.
We’ve already linked you to a couple of SuperMoney articles that will tell you all you need to know about conforming loans and the secondary mortgage market. Here’s a quick summary of how you can end up with a GSE mortgage:
GSE mortgages step by step
- Get preapproved for a conforming conventional loan by a bank or other lender.
- Find the house you want to buy and get a mortgage commitment letter from your lender.
- Sign all the home-purchase paperwork, your mortgage loan finalizes, and you close escrow.
- Behind the scenes, and likely without your knowing about it, your lender sells the loan to Fannie Mae or Freddie Mac (typically in exchange for mortgage-backed securities. You now have a GSE mortgage.
The next two steps don’t affect you as a borrower, but we like to be thorough.
- Fannie Mae or Freddie Mac then retains possession of the loan or, much more often, bundles it with other loans into a mortgage-backed security (MBS).
- The GSE then sells the MBS to investors.
GSE mortgages and refinancing
One of the advantages of having a GSE mortgage is you can refinance it without having to worry about paying a prepayment penalty. So, if you find that you can qualify for a better rate, or would like to tap into your home equity with a cash-out mortgage refinance, you can do so without paying a penalty. However, it is important to compare multiple lenders because rates and origination fees can vary considerably from one lender to another.
What are GSE mortgage loan limits?
To become a GSE mortgage, your home loan has to fulfill conforming loan requirements. These include a limit on the total loan amount. This amount is updated each year by the FHFA. In 2022, the FHFA set the national baseline conforming loan limit for single-unit (one-home) properties to $647,200.
To see what the GSE mortgage (conforming loan) limit for 2022 is in your area, find that area on the map below.
Why are GSE loans popular?
GSE loans are popular with lenders, borrowers, and investors. Each group likes GSE mortgages for its own reasons.
Why GSE mortgages please lenders
Lenders love turning mortgage loans into GSE mortgages because it allows them to transfer most of the risk to the GSEs and their investors. Of course, when GSEs buy mortgages from loan originators they usually pay for them with mortgage-backed securities (MBS), which are the same home loans they bought from originators bundled into bonds. Then, in exchange for a fee, the GSEs then guarantee the timely payment of the monthly interest and principal due on the mortgage-backed securities.
This process spreads the risk of any particular mortgage defaulting to all the owners of MBS bonds, which makes loan originators feel much more secure about their profit prospects when they issue conforming loans.
Why do GSE loans get a thumbs-up from borrowers
Borrowers love them because the government’s support for the GSEs makes these mortgages originated by private lenders behave a lot like mortgages that the government directly insures or guarantees. Though the mortgages that are officially government-backed, such as FHA and VA loans, may still offer better value (if your credit is less than excellent), the de facto government backing of GSE mortgages makes conforming mortgages a better value than wholly private home loans (almost always).
Conforming loans that become GSE mortgages vs. qualified mortgages.
For a time, mortgages could be conforming without meeting all the normal requirements to be qualified. This was due to a “GSA patch” that allowed Fannie Mae and Freddie Mac to buy certain mortgages that didn’t quite satisfy Consumer Financial Protection Bureau (CFPB) standards for qualified mortgages.
The Dodd-Frank Act required conforming mortgage loans to adhere entirely to the consumer protection requirements of that Act, meaning they had to fully comply with the regulatory dictates of the CFPB. This meant that conforming loans had to be qualified mortgages. The GSA patch let conforming loans that violated certain qualified mortgage requirements be declared qualified all the same. Thus, a loan to a borrower with a debt-to-income ratio higher than allowed at the time could still be deemed qualified and CFPB-compliant.
The GSA patch is no more. Today, the conforming loans that can become GSE mortgages must all be qualified mortgages.
Why investors value government-sponsored-enterprise mortgages
Investors, too, love GSE loans. Why? Mortgage-backed securities sold by GSEs are investments with little perceived risk. Will the government let Fannie Mae or Freddie Mac fail if a widespread economic calamity causes the mortgage market to crash? Most investors think not. These investors include the lenders that sell their loans to Fannie and Freddie, since loan originators usually receive mortgage-backed securities as payment for their loans.
- A government-sponsored-enterprise mortgage is a mortgage owned by a government-sponsored enterprise or GSE.
- You will never be offered a GSE mortgage. Instead, you will be offered a conforming loan that a GSE will buy on the secondary market.
- The GSEs most likely to buy your home-purchase mortgage are Fannie Mae and Freddie Mac.
- Conforming loans that can become GSE mortgages will usually offer better interest rates (lower APRs) than other conventional loans.
- Loans directly backed by the government, such as FHA and VA loans, usually offer an even better deal to borrowers who qualify but have less than excellent credit. Be sure you look into these before you commit to a conventional mortgage, whether conforming or nonconforming.
- Jumbo loans, loans larger than those Fannie Mae and Freddie Mac may purchase, are an example of nonconforming conventional loans.
Home buying and home financing can be remarkably complex. The subject of this article, government-sponsored-enterprise mortgages, is just one topic a potential home buyer should read up on. Additional topics worth some study time include:
- How to find the best mortgage lenders and loans for your home purchase.
- How to buy a house at auction, which could let you acquire a home at a below-market price.
- How to buy a house with a tax lien or invest in tax liens, ways to profit from existing homeowners’ failure to meet tax obligations.
- How to finance multiple home purchases as a real estate investor using a blanket mortgage.
Whatever type of home financing you ultimately decide to pursue, SuperMoney can help you find the best loan offers satisfying your criteria. Our advanced search filters and unbiased real-customer reviews can make your loan search faster and easier.
View Article Sources
- A Pathway to Shutting Down the Federal Housing Finance Enterprises — Heritage Foundation
- Eligibility Matrix — Fannie Mae
- Fannie, Freddie Announce Effective End of ‘GSE Patch’ — ABA Journal, American Bankers Association
- Fannie Mae and Freddie Mac — Federal Housing Finance Agency (FHFA)
- Fannie Mae’s New Refinance Option Available Beginning June 5 — Fannie Mae
- Federal Home Loan Bank System — FHFA
- FHFA Announces Conforming Loan Limits for 2022 — FHFA
- Guarantee Fees History — FHFA
- Mortgage-Backed Securities — Financial Industry Regulatory Authority (FINRA)
- Mortgage rules — CFPB
- Neither Fish Nor Fowl: An Overview of the Big-Three Government-Sponsored Enterprises in the U.S. Housing Finance Markets — Mercatus Center, George Mason University
- Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition — Federal Register
- Selling Guide: Fannie Mae Single Family — Fannie Mae
- Promote the General Welfare Clause — ConSource, Quill Project, Pembroke College Oxford
- The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary — Congressional Research Service
- What is a Qualified Mortgage? — CFPB
- Who are Freddie Mac, Fannie Mae, and Ginnie Mae? — Michigan State University
- A Complete Guide to Down Payment Assistance — SuperMoney
- Best Mortgage Lenders — SuperMoney
- Buying a House with a Tax Lien? Here’s What You Need to Know — SuperMoney
- Can a First-Time Home Buyer Get a Jumbo Loan? — SuperMoney
- Home Purchase Mortgages: Reviews & Comparisons — SuperMoney
- How Long is a Mortgage Preapproval Good For? — SuperMoney
- How to Buy a House at Auction: Step-by-Step Guide — SuperMoney
- How to Finance a House — SuperMoney
- Mortgage Industry Study — SuperMoney
- Mortgage Refinance: Reviews & Comparisons — SuperMoney
- The Definitive Guide to FHA Loans — SuperMoney
- The Ultimate Guide To Buying A New Home — SuperMoney
- Veterans, Thinking of Buying a House? Here’s Why VA Loans Are Better than Conventional Mortgages — SuperMoney
- What are Fannie Mae and Freddie Mac? — CFPB
- What Is a Blanket Mortgage? — SuperMoney
- What Is a Conventional Loan? —SuperMoney
- What Is a Conforming Loan? — SuperMoney
- What is a Qualified Mortgage? — SuperMoney
- What Is a Mortgage Commitment Letter? — SuperMoney
- What is the Secondary Mortgage Market and How Does It Work? — SuperMoney