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Encyclopedia > Mortgage GSE controversy

The controversy in relation to the United States mortgage government sponsored enterprises (GSEs) was triggered by accounting scandals, which urged the US government to consider tightening the control over them. The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. ... Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. ...

The two largest housing GSEs of Fannie Mae (FNMA) (http://www.fanniemae.com) and Freddie Mac (http://www.freddiemac.com) own and/or securitize upwards of 70% of the residential mortgage loans in the United States. Ginnie Mae (GNMA) (http://www.ginniemae.gov) is a government corporation that performs a similar function to Fannie and Freddie, and has the explicit backing of the full faith and credit of the United States government, although there is a perception (and a political reality) that Fannie and Freddie are "too large to fail" and, therefore, will be bailed out by the government should they get into financial trouble. This perception is reinforced by their line of credit with the U.S. Treasury and other benefits of GSE status, such as exemption from state and local taxes and use of the Federal Reserve as a transfer agent. The United States Federal Government created the Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, in 1938 to establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). ... The Federal Home Loan Mortgage Corporation (Freddie Mac) (NYSE: FRE) is a stockholder-owned, publicly-traded company chartered by the United States federal government in 1970 to purchase mortgages and related securities, and then issues securities and bonds in financial markets backed by those mortgages in secondary markets. ... This article does not cite any references or sources. ... The Government National Mortgage Association (GNMA, also known as Ginnie Mae) was created by the United States Federal Government through a 1968 partition of the Federal National Mortgage Association. ...

A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk. While GSEs clearly state their securities are not backed by the U.S. government, the market largely perceives them to have an implicit government guarantee. This is demonstrated in the financial markets, where Fannie and Freddie debt trade at spreads much lower than the safest (AAA) corporates and only slightly above comparable Treasury securities. See, for example, GAO GGD-96-120 (http://www.gao.gov/archive/1996/gg96120.pdf) or CBO's Federal Subsidies and the Housing GSE's (http://www.cbo.gov/showdoc.cfm?index=2841&sequence=0) In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ...

Companies competing with these GSEs generally only securitize mortgages which the GSEs will not securitize, either because they are too large (jumbo mortgages) or because they do not meet the GSE's underwriting standards (subprime mortgages). GNMA only guarantees government-insured mortgages; mortgages issued to veterans and guaranteed by the Department of Veterans Affairs; or mortgages guaranteed by the Federal Housing Administration or Rural Housing Service. The United States Department of Veterans Affairs (VA) is a government-run military veteran benefit system with Cabinet-level status. ... The FHAs logo The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. ... Rural Housing Service - Wikipedia, the free encyclopedia /**/ @import /skins-1. ...

The debate about limiting the growth and enforcing additional regulations on the GSEs has been ongoing and increasing. There have been news reports of various financial irregularities at these GSEs in 2003 and 2004. If the GSEs either mismanage their funds, or there is a large rise in interest rates that the GSEs have not hedged, the "implied" government guarantee could lead to the government having to pay off their debts despite no legal obligation to do so. Since they are corporations, some view the existence and growth of the GSEs as a government takeover of a large private industry with all the risks typically associated with doing so. In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. ... “Corporate” redirects here. ...

GSEs are a hybrid form of a corporation designed to use privately provided capital in pursuit of publicly developed missions. The GSEs do not use any taxpayer money nor do they state anywhere in legal disclosures the government guarantees their securities. The current regulatory format imposes rigorous capital and stress testing by their regulator, the Office of Federal Housing Enterprise Oversight, or OFHEO (http://wwww.ofheo.gov). Some have viewed the GSEs' abilities to raise private capital in pursuit of public goals a model example of government at its best. Some have questioned this assertion, and there have been questions regarding the rigorousness of the capital and stress testing by OFHEO.[citation needed]

The Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises, chaired by Rep. Paul Kanjorski, holds oversight hearings on the Federal National Mortgage Corporation (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The committee Paul E. Kanjorski (b. ...

"..watches over the U.S. capital markets, securities and insurance industries and government-sponsored enterprises, such as Fannie Mae and Freddie Mac. It oversees the Securities and Exchange Commission as well as the self-regulatory organizations that police the securities markets."



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