Mortgage GSE controversy

The controversy in relation to the "big three" United States mortgage government sponsored enterprises was triggered by accounting scandals in two of them, which ugred 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.

These GSEs have driven many other mortage companies out of business due to GSEs being able to issue bonds at very low interest rates. A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk.

Companies competing with these GSEs generally only securitize mortgages which the GSEs will not securitize. GNMA does not issue gurantees 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 guranteed 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 government guarantee means the taxpayers would have to pay off their debts. 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.

The GSEs are also known for having made large investments in the lobbying of Congress to keep them regulated in a "friendly" manner. This lobbying has mostly worked because the benefits (listed above) seem to outweigh the risks. This debate will probably continue unless and until there is a large taxpayer bailout to force the US Congress to reconsider its stand on the issue.