Local lenders avoid pitfalls
We’ve been hearing a lot these days about Fannie Mae and Freddie Mac, but did you know they have a smaller, rural cousin named Farmer Mac?
Farmer Mac, which operates a secondary market for farm loans, got in trouble because of its investment in Fannie Mae shares.
Farmer Mac owned $47.2 million of Fannie Mae preferred shares at the end of June. About $44 million of value was shaved off Farmer Mac’s market value when the government acquired Fannie Mae, threatening to drain its capital below the minimum level required by regulators.
Farmer Mac also held $60 million in Lehman Brothers debt securities when the company declared bankruptcy.
Recently, a group of Farm Credit System banks helped rescue Farmer Mac by purchasing $65 million of its preferred shares.
Farmer Mac, officially known as the Federal Agricultural Mortgage Corporation, was established by Congress in the Agricultural Credit Act of 1987.
Creation of Farmer Mac was one response to the farm crisis of the 1980s when large surpluses, falling farm prices and land values, and rapidly rising inflation caused many farmers to default on loans they had taken out during the prosperous years of the 1970s.
The crisis was severe enough to threaten the viability of the Farm Credit System from which many farmers had received their loans.
By creating Farmer Mac to provide a secondary mortgage market for agricultural loans, Congress sought to safeguard the economy from such a credit crisis in the future.
Its goal was to increase the availability of competitively priced mortgage financing to farmers, ranchers, and rural homeowners and to provide greater liquidity and lending capacity to agricultural lenders.
Local lending not affected
Rural bank lenders have been riding high, benefiting from a two-year boom in grain prices, which has lifted farmland prices to record levels.
Because land is the biggest source of collateral for farmers, the farm-debt picture is its brightest in decades, and the delinquency rate on the $9.5 billion in farm and rural loans under Farmer Mac’s umbrella is the lowest in its history.
According to Greg Bowers, a commercial loan officer at Central National Bank in Marion, CNB has not used Farmer Mac, even though it would be another source of lending money.
He said Farmer Mac only is interested in buying large long-term loans, mainly at fixed rates.
He said most of CNB’s lending ability comes from CDs and other savings accounts. The money is a source of funding for short-term notes.
Business continues as usual, he said, albeit with credit standards “a little higher.”
With grain prices falling by more than 35 percent since Sept. 1, some farmers have lost $40,000 or more of potential income. However, prices still are historically above average and farmers are having their best year by far, Bowers said.
“In agriculture, the market goes up and down, and you have to be able to roll with it,” he said.
He believes farmers will be a little more cautious in how they borrow and spend money in the coming weeks and months.
Last modified Oct. 22, 2008