LIVE: What's a GSE? Fannie Mae, Freddie Mac Weren't the First

While the Treasury Department hosts today's conference about the future of the GSEs Fannie Mae and Freddie Mac, you may be wondering what is a GSE and how did we get into this mess in the first place?

For more conference-related coverage from AOL Real Estate, read these columns by housing experts Alyssa Katz, Jeff Corbett, and Patricia Orsini.

GSE is short for government-sponsored enterprise. These enterprises include a group of corporations in the financial services arena that were created by the U.S. Congress to enhance the flow of credit to particular markets. So they are hybrid corporations that raise private capital to fulfill their public mission.

Congress' intent in creating GSEs was to improve the flow of credit for particular segments of the capital markets, such a mortgages or student loans. They operate under the banner of the federal government as federally chartered institutions.
Fannie Mae and Freddie Mac were not the first GSEs. The first GSE was created by Congress in 1916 and called the Farm Credit System, which is a network of federally chartered cooperatives and related service organizations that lend to agricultural producers, rural homeowners, farm-related businesses, and public utility cooperatives in the U.S.

Next on the list of GSEs created by Congress was the Federal Home Loan Banks, which became GSEs in 1932. The banks are owned by the corporations that use their services. These banks do not lend to individuals only to other banks. Their role is to provide stable, low-cost funding to member institutions for home mortgages and small business loans. They also provide loans for rural, agricultural and economic development.

Fannie Mae, officially called the Federal National Mortgage Association, was established in 1938 after the Great Depression to develop a secondary mortgage market, which buys up mortgages from their originators (mostly banks) and frees up new money for lending. Initially Fannie Mae bought up primarily federally insured mortgages of the Federal Housing Administration (FHA).

But in 1968 Fannie Mae was converted into a shareholder-owned corporation, so its activity could be removed from the balance sheet of the federal government. Fannie Mae was actually split in two government entities. Guaranteed loans, such as FHA, Veterans Administration (VA) and Farmers Home Administration (FmHA) fell under the new governmen-owned corporation -- the Government National Mortgage Association (GNMA). GNMA is wholly owned by the government and falls under the Department of Housing and Urban Development.

By 1970, Fannie Mae was authorized to buy private mortgages, not insured by the government. In the same year, Congress created Freddie Mac, officially called the Federal Home Loan Mortgage Corporation, to compete with Fannie Mae. Congress wanted to facilitate a more competitive and efficient secondary mortgage market.