The controversy in relation to the "big three" United States mortgage government sponsored enterprises (GSEs) was triggered by accounting scandals in two of them, which urged the US government to consider tightening the control over them.

The "big three" housing GSEs of Fannie Mae (FNMA), Ginnie Mae (GNMA) and Freddie Mac own or securitize upwards of 70% of the residential mortages in the United States. Only GNMA 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 all three are "too large to fail", and therefore will be bailed out by the government should they get into financial trouble.

A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk. While GSE's clearly state their securities are not backed by the U.S. government, the market largely perceives them to have an implicit government guarantee.

Companies competing with these GSEs generally only securitize mortgages which the GSEs will not securitize. GNMA does not issue guarantees which increase the risk to the government, therefore they only securitize mortgages which are already guaranteed by the government. As a practical matter, these are either mortgages issued to veterans and guaranteed by the Department of Veterans Affairs, or mortgages guaranteed by the Federal Housing Administration. Because their bonds have a higher risk than the GSEs, their bonds (and therefore their mortgages) have a higher interest rate.

The debate about limiting the growth and enforcing additional regulations on the GSEs has been ongoing and increasing. There have also 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.

GSEs are a hybrid form of a corporation designed to utilize 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 securites. The current regulatory format imposes the most rigorous capital and stress testing of any financial entity in the United States. Some have viewed the GSEs abilities to raise private capital in pursuit of public goals a model example of government at its best.

Mortgage | Economy of the United States | Finance | Controversies | Scandals