A Life Struggle Looms in '92 For Farmer Mac

After four years of false starts and broken promises, the Federal Agricultural Mortgage Corp. has disillusioned even its most ardent advocates.

Some even suggest it may be time to scrap the newest federally chartered secondary mortgage market agency, known as Farmer Mac.

Farmer Mac's shortcomings are glaring. The agency has yet to assemble a single pool of loans or guarantee a security under its flagship program. That is despite repeated assertions by its management that a breakthrough was at hand.

The management includes some of the best-compensated people in Washington. In 1990, Farmer Mac distributed $1.3 million in salaries, bonuses, and benefits among six employees - even though it lost money.

But roughly 1,400 stockholders - banks, insurance companies, and Farm Credit Banks - who plowed $23 million in seed money into Farmer Mac have yet to reap their first dividend.

A Cloudy Future

"So many promises have been made, and so few kept to date," said J. Ken Goodmiller, a General Accounting Office manager. He wrote a recent report for Congress that concluded Farmer Mac's future was in doubt.

Mr. Goodmiller and his staff found that lenders see no pressing need to sell farm mortgages to Farmer Mac at this point. And poolers - the middlemen who would assemble pools of loans into guaranteed securities - are concerned that there may not be enough volume to support a secondary market.

Even supporters acknowledge that Farmer Mac may be doomed unless it gets on its feet soon.

Legislative Move Seen

"If the program is still floundering next year, you'll see a big legislative push to deauthorize it," said Ronald Ence, director of agricultural and rural affairs for the Independent Bankers Association of America.

Farmer Mac is countering the disappointments by making more promises.

"We're more optimistic than we've ever been," president and chief executive Henry D. Edelman said in a recent interview.

In the past six weeks, he noted, Farmer Mac has certified two large insurance companies - Prudential and John Hancock -- to pool loans originated by stockholders, which include commercial banks, insurance companies, and Farm Credit System members.

Mr. Edelman is also upbeat about Farmer Mac's innovative linked-portfolio strategy, under which the agency would jump-start the secondary market for farm loans by buying loan-backed securities itself and funding the purchases by issuing debt.

There is a hitch. While Mr. Edelman maintains that Farmer Mac has the authority to issue debt for this purpose, its regulator, the Farm Credit Administration, disagrees. So does the General Accounting Office. The matter may have to be decided by Congress or in court.

Some observers say Farmer Mac's startup problems are easy to explain: borrowers don't want Farmer Mac loans, and investors don't want Farmer Mac securities.

"The market is telling you there really isn't a demand for what Farmer Mac has to offer," said David Freshwater, an associate professor of agricultural economics at the University of Kentucky, Lexington. "Lenders don't feel they can sell it to farmers."

One reason: farmers are trimming their debts, not expanding them.

Farmer Mac is "trying to establish this market in an era when the market is not growing," said Jerome M. Stam, an analyst with the economic research service of the U.S. Department of Agriculture.

Indeed, $78.4 billion in farm real estate debt was outstanding at the end of 1990, down from $87.7 billion in 1987, according to the economic research service. And Farmer Mac officials estimate that less than $27.1 billion is eligible for sale into Farmer Mac pools.

Original Objectives

When Congress chartered Farmer Mac in 1987, it was considered part of a solution to a crisis that crippled farmers and lenders a few years earlier. The idea was to tap the capital markets as a stable source of long-term real estate funds for farmers and ranchers.

By creating a market for high-quality real estate and land loans, Farmer Mac would promote common underwriting standards, give lenders access to liquidity, and shift interest-rate risk to private investors.

They hadn't anticipated that economic conditions would change and originators would choose to hold their loans.

|Like Fire Insurance'

Most commercial bankers who bought stock in Farmer Mac continue to voice support for the program. But nobody seems to want to make the first move by offering up loans for a pool.

Meanwhile, bankers increasingly emphasize Farmer Mac's role as a backstop liquidity source.

"It's just like fire insurance," said John Dean, president of Glenwood State Bank, Iowa. "Just because you didn't need it last year doesn't mean you shouldn't have it."

Despite the setbacks, Mr. Edelman remains confident. He denounces the naysayers as "ostriches."

"They are ignoring the potential benefits of diversification of credit risk and shifting interest rate risk from lenders to the capital market," Mr. Edelman said.

Success by Housing Agencies

The secondary market agencies for home loans - Fannie Mae and Freddie Mac - have transformed housing finance by providing liquidity to lenders and competitive rates to homeowners, he said. "Agriculture deserves the same."

He emphasized that Farmer Mac has issued $10 million in securities under a spinoff program to securitize government farm loans, but acknowledged that Farmer Mac must be judged on its ability to create a $1 billion market for nongovernment loans.

Mr. Edelman, a former Paine Webber investment banker who joined the agency in 1989, noted that Fannie Mae and Freddie Mac took a long time to get off the ground. But even he admits disappointment at Farmer Mac's slow progress: "I would have liked to see this thing jump up and go fast."

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