Government Sponsored Enterprises (GSEs): Federal Farm Credit Bank, Federal Home Loan Bank System, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae) and Student Loan Marketing Association (Sallie Mae).
What Are Government Sponsored Enterprises (GSEs)?
Government Sponsored Enterprises, known as GSEs, are privately owned corporations created by Congress to provide funding to help reduce the cost of capital for certain borrowing sectors of the economy such as homeowners, students, and farmers. GSE securities are perceived to carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government.
Note: GSEs are commonly referred to as “Agencies”, however there is a difference between Government Sponsored Enterprises and a Government Agency. An example of a Government Agency is the “Government National Mortgage Association (GNMA)” which has the full backing of the U.S. Government.
GSEs are most suitable for purchasing and holding to maturity. However, if investors find it necessary to sell their holding prior to maturity, GSE obligations are traded on the secondary market at prevailing market prices, which may be more or less than the original amount invested. In some cases, liquidity may be limited due to market conditions.
GSE debt is generally considered to be of high credit quality due to the implied backing of the U.S. Government, but ultimately it is the sole obligation of its issuer. For that reason, GSEs are considered to carry somewhat greater risk than securities issued by the U.S. Treasury or Government Agencies that carry the full faith and credit of the U.S. Government.
Tax Status of GSEs
The interest income of GSEs is subject to federal income taxes.
To learn more about how GSEs can play a strategic part of your portfolio, contact us.