Gaining Acceptance by Ag Bankers, Farmer Mac Plows Deeper into Black

The once-struggling Farmer Mac program is slowly winning over agricultural bankers who are looking for liquidity as well as a way to make bigger loans.

The dollar total of loans bought by the Federal Agricultural Mortgage Corp. has risen nearly 64% in the last two years, and the formerly money- losing corporation turned a profit in 1997 for the second consecutive year. What's more, Farmer Mac's class C stock has soared to more than $60 a share, from a low of $4.25 in 1995.

"Farmer Mac is making significant progress," said Thomas R. Clark, vice president of corporate relations. But "we've got a long way to go."

Farmer Mac has $800 million of outstanding securities, a tiny portion of the $40 billion of eligible loans.

Congress established Farmer Mac in 1988 to create a secondary market for agricultural real estate and rural housing mortgage loans. The goal: to increase the supply of money available for rural financing, much as Fannie Mae was created to do the same for home loans, and Sallie Mae, for student loans.

Farmer Mac buys loans and then packages and sells them to investors as securities.

Initially, Farmer Mac lost money and generated little interest among bankers. Officials say the original program failed because it would not let banks sell loans directly to Farmer Mac. Instead, banks had to sell loans to a pooler-a large commercial bank or insurance company. Bankers said the third party added costs, which translated into higher interest rates for farmers.

"We had so many bankers tell us poolers weren't responsive," Farmer Mac's Mr. Clark said. "There were too many complications trying to sell loans to the poolers."

In 1996, Congress changed the law to let Farmer Mac act as its own loan pooler and also to eliminate a requirement that banks hold 10% in cash reserves for the loans they sold. It also gave the corporation two years to reach a minimum capital level of $25 million.

"The changes in '96 made all the difference," said John Blanchfield, the American Banker Association's manager of agricultural banking and rural development. "I am hearing more bankers talking about the benefits of the program."

Bankers said the program lets them move long-term, fixed-rate agricultural real estate loans off their books.

Selling loans on the secondary market also lets small rural banks make larger loans without retaining the risk, they said. Finally, some banks earn fee income from Farmer Mac by retaining servicing rights.

"It's been a great deal for us," said Tom Hammons, senior credit officer at North Cascades National Bank, Chelan, Wash. It made $1.3 million in fee income from such servicing in the last three years, he noted.

"Either we provide the loans, or they'll go somewhere else," added Mr. Hammons.

Farmer Mac has used workshops, direct mail, and cold calls to drum up business with banks. In addition to securitizing agricultural loans under the Farmer Mac 1 program, the government-sponsored enterprise also buys the securitized portion of Farm Service Agency loans through the Farmer Mac 2 program.

So far, 150 lenders, most of them community banks, are selling loans to Farmer Mac, according to Tom Stenson, vice president for agricultural finance at the agency. Seventy lenders have applications pending.

The lenders include some Farm Credit System banks, government-sponsored enterprises that compete with community banks by lending directly to farmers. Bankers and Mr. Clark said securitizing through Farmer Mac helps community banks match the rates and terms offered by Farm Credit institutions.

Farmer Mac officials won't project how many lenders they hope to sign up. But Mr. Clark said the company wants to capture a larger share of the farm real estate business.

"Farmer Mac is working to become a significant source of funding for agricultural mortgages," Mr. Clark said. "The secondary market, when fully established, will be a mainstay of the industry."

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