government sponsored enterprise

The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to reduce interest rates for specific borrowing sectors of the economy, students, farmers, and homeowners. The mortgage borrowing segment is by far the largest of the borrowing segments that the GSEs operate in.

Business

The GSEs have created a secondary market in these loans through securitization so that the primary market debt issues can be bought and—most importantly—traded by investors. Demand for debt securities drives up their trading price, which lowers their interest rates. Proponents say that this secondary market in consumer loans gives household borrowers cheap fixed rate loans (low fixed rates on long term loans), removes credit risk from banks' balance sheets and provides standardized instruments (securitized securities) for investors.

Ownership

None of the GSEs are owned by the Federal government; some of them are publicly owned, some are owned by the corporations that use their services. Their lenders grant them extraordinary low rates, and the buyers of their securities grant them extraordinary high prices, as the implicit involvement of the Federal government gives them a sense of financial security. (The influence of Fannie Mae and Freddie Mac, in particular, in the U.S. economy is such that many analysts say the government "could not let them fail".)