Federal Agencies

What Is a Federal Agency?

Federal agencies are special government organizations set up for a specific purpose such as, the management of resources, financial oversight of industries, or national security issues. These organizations are typically created by legislative action, but may initially be set up by presidential order as well. The directors of these agencies are typically selected by presidential appointment.

Understanding Federal Agencies

Federal agencies are created by the government to regulate industries or practices that require close oversight or specialized expertise. Some organizations, such as the Federal Deposit Insurance Corporation (FDIC) and the Government National Mortgage Association (GNMA), have their operations explicitly backed by the U.S. Treasury. Other organizations, such as Fannie Mae, Freddie Mac, and Sallie Mae are only provided with an implicit guarantee from the U.S. Treasury.

A number of the organizations which are an actual part of the government issue securities such as stocks and bonds. These have been historically popular with investors. Federal agency bonds, which are bonds that are backed by the full faith and credit of the United States government, are examples of federal agency securities. Investors expect to receive regular interest payments from holding an agency bond. At maturity, the full face value of the agency bond is repaid to the bondholder. Because federal agency bonds are less liquid than Treasury bonds, they offer a slightly higher rate of interest than Treasury bonds. Examples of federal agencies that guarantee certain bonds or securities include the Federal Housing Administration (FHA), Small Business Administration (SBA), and Government National Mortgage Association (GNMA or Ginnie Mae).

Other Types of Government Bonds

Another type of bond issued by government agencies is the government-sponsored enterprise (GSE) bond. These bonds are issued by corporations that are not quite part of the government but are set up by Congress to work for the common good of the country. These enterprises mostly operate on their own and are publicly held on the major exchanges. GSEs include the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage (Freddie Mac), Federal Farm Credit Banks Funding Corporation, and the Federal Home Loan Bank (FHLB). The government guarantee that applies to agency bonds does not apply to GSE bonds, which therefore have credit risk and default risk. For this reason, the yield on these bonds is typically higher than the yield on Treasury bonds.

Mortgage loans are backed by federal agency securities issued by Ginnie Mae, Fannie Mae, Freddie Mac or the FHLB, and hold a very high credit rating. Agency securities are also used as collateral for the supply of money released by the Federal Reserve. Sold by a nationwide group of banks and dealers, these securities raise money to fund public needs such as road building, low-cost housing, urban renewal, and also to provide low-interest rate loans to farmers, small business owners, and veterans.