BankNews — Ag Banking 1st Quarter Supplement 2013
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Rural Lenders Praise Farmer Mac

Remember the 1980s? A pair of researchers at the Federal Reserve Bank of St. Louis, Michael T. Belongia and R. Alton Gilbert, captured the essence of the decade’s financial strife in a December 1985 publication: “Some economists estimate that 5 percent or more of all farms currently in business will go into bankruptcy in 1986, and that one farm in seven will fail within the next four years. A recent study by two agricultural economists estimates that farm lenders may write off as much as $50 billion in bad farm debt over the next four years, with $20 billion cited as the ‘most probable’ loss estimate.”

The authors went on to note that losses to that point had been large enough to cause a substantial increase in the failure rate among agricultural banks. “Accounting for 22 percent of bank failures between 1981 and 1983, agricultural banks have made up about two-thirds of all failed banks since July 1984; 62 agricultural banks failed during 1985,” they wrote.

Responding to the growing agricultural credit crisis Congress authorized, in 1987, the Federal Agricultural Mortgage Corp. with a mandate to create a secondary market for qualified agricultural real estate and rural housing mortgage loans. In the years since, Farmer Mac’s authorities have been expanded to include the ability to purchase certain USDA-guaranteed loans, to purchase unguaranteed agricultural and rural housing mortgage loans, and to purchase rural utility loans.

Structured as a stockholder-owned instrument of the United States, Farmer Mac funds itself by offering debt securities of various maturities in the public capital markets through a network of more than 20 dealers. The securities include discount notes and fixed- and floating rate medium-term notes, including callable notes. The secondary-market facility is regulated by the Farm Credit Administration and the Securities and Exchange Commission.

As it celebrates its 25th anniversary this year, Farmer Mac has nearly 1,100 relationships and partnerships with rural banks, Farm Credit System institutions, USDA departments such as the Farm Service Agency and Rural Development, and rural electric cooperatives. Tools available to these clients include long-term fixed-rate funding or additional lending capacity, alleviating capital pressure on the lenders, or helping them manage the risks in their agricultural credit portfolios.

Farmer Mac conducts its agricultural loan activities through three programs:

1. Farmer Mac I, covering eligible agricultural mortgage loans or securities backed by eligible agricultural mortgage loans. To be eligible, loans must meet Farmer Mac underwriting standards and be secured by mortgages on agricultural real estate.

2. Farmer Mac II, covering the guaranteed portions of loans guaranteed by USDA agencies under the Consolidated Farm and Rural Development Act, including the Farm Service Agency (guaranteed farm ownership and operating loans) and Rural Development (business and industry and community facility Guaranteed loans).

3. In addition, there is a program targeted to rural utilities.

How it Works
Community bank lenders have the option of accessing Farmer Mac directly by becoming a Farmer Mac seller or indirectly by becoming a correspondent lender for an existing seller. Institutions electing to sell loans directly to Farmer Mac submit a seller application, sign a seller/servicer agreement and purchase voting stock in accordance with the asset size of the institution.

Many lenders access the agency to enable their farm customers to benefit from the long-term fixed rates, up to 25 years. However, a wide variety of competitively priced product options are available, ranging from indexed ARMs (one month up to five-year ARMs) and VRM product options where the rate resets every 10 or 15 years. The AgEquity revolving line of credit enables farm customers to use their equity in land to access a five-year or 10-year revolving line of credit.

One community bank lender who has used the secondary market facility to his benefit and that of his farm customers is John Etchison of Valley Republic Bank, a $350 million asset bank in Bakersfield, Calif. Valley Republic uses Farmer Mac to compete for almond, table grape and citrus loans in the southern San Joaquin Valley. “The main reason we use Farmer Mac is to get a foot in the door. As a small bank we are always trying to attract large, successful producers. The rates and terms offered through Farmer Mac allow us to accomplish this.

“Today’s market is very demanding,” Etchison said. “The loan approval times from Farmer Mac are very fast and that helps us put loans together quickly and stay ahead of the competition.”

Another such lender is Marie Haahr with Bank of Hartington, a $67 million asset bank in Hartington, Neb., which is a stone’s throw from the South Dakota and Iowa borders. Haahr explains that prior to using Farmer Mac, her bank typically shied away from ag real estate loans due to local competition from larger lenders. “A few years ago we started using Farmer Mac to get us into markets we have never been in, and we have been very successful in attracting new customers,” she said.

“Farmers in our area are looking for the cheapest interest rate possible and the ability to lock the rate as long as possible. We can now offer that product through our relationship with Farmer Mac,” Haahr continued. “One of our farmers consolidated their debts and refinanced their real estate loan with a Farmer Mac product and the savings is approximately $100,000 per year.”

Alan Forristall, who is with Midland States Bank in Princeton, Ill., a $1.5 billion asset community bank headquartered in Effingham, Ill., is a relatively new participant with Farmer Mac, completing the first transaction in 2012. “Our goal is to ‘fully’ bank all of our farm customers. Farmer Mac assists the bank by providing competitive financing for the real estate portion of these relationships,” Forristall said.

“Farmer Mac provides a risk management tool we can market to our local farmers. Today, we can get the producer a historically low long-term fixed rate on their real estate, while still generating income for the bank,” he said. “We can do and will do more Farmer Mac loans in the future.”