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The FDIC may soon have another option for resolving failed banks whose assets include farm loans. Traditional banks are not welcoming the expected change.
May 10 -
The leadership of the House Financial Services Committee has asked the Farm Credit Administration to withdraw a proposal that would give Farm Credit System lenders more authority to finance nonfarm projects, such as hotels and hospitals.
July 17
Joe Pierce doesn't hold a grudge when a farmer finds more favorable terms with a Farm Credit lender, but he isn't prepared to give up government-backed home loans as easily.
The Department of Housing and Urban Development is floating a
As described in the agency's proposed rule, credit has tightened for borrowers in small towns and Farm Credit could "provide an additional avenue for mortgage financing in rural areas." The proposed rule was introduced in late August; the comment period ends on Oct. 25.
To Pierce, who serves as the president and chief executive of the $472 million-asset Farmers State Bank in LaGrange, Ind., the controversial proposal crosses the line. "We've had several customers over the years take advantage of Farm Credit," he says.
"You know, that's great, because quite frankly, our customers benefit as a result," Pierce adds. "But when they are seeking to expand their lending into other areas where the only requirement is the ability to spell 'farm,' that doesn't seem to be appropriate."
Farm Credit lenders already have the ability to underwrite mortgages. But rules allow mortgages to make up 15% of those lenders' portfolios. Such loans have to be for "modest" homes and in areas with less than 2,500 residents. In 2010, Farm Credit lenders originated roughly 44,000 home loans.
HUD declined to comment for the story since the rule is in its comment period, but in a proposal the government agency says including Farm Credit lenders in the program could result in the origination of an additional 2,200 loans.
HUD said in its proposed rule that Farm Credit was omitted from the program previously because there was already an abundance of mortgage credit available.
"There was little need to include the Farm Credit Banks and Agricultural Credit Associations," the proposed rule reads. "However, the downturn in the mortgage lending market has prompted HUD to reconsider this omission. As lenders strive to increase capital reserves and tighten underwriting standards, and as private mortgage insurers retreat from some markets, the availability of financing for housing is reduced, particularly in rural areas."
Ken Auer, the president and chief executive of the Farm Credit Council, a Washington trade group that represents Farm Credit lenders, says he is not sure why bankers are bothered by the proposal, since it would not change the limitations Farm Credit lenders have.
"The system would have the same restrictions in making credit available. This would just be another tool for originators to utilize," Auer says. "We have a problem in the housing industry in this country and FHA has come to the conclusion that there is additional need for mortgage credit. This might help in a marginal way."
Auer argues that the banking industry has many of the same advantages such as its ability to borrow from the Federal Home Loan Banks.
Still, the issue has drawn the attention of bankers in rural areas across the country.
Leslie Andersen, the president of the $65 million-asset Bank of Bennington in Nebraska, echoed Pierce's concerns over the ability for banks to compete with Farm Credit over FHA mortgages should the rule be approved.
Anderson is particularly bothered by HUD's claims that rural borrowers are facing a credit crunch. While standards have tightened, Andersen said some of the constraint is of HUD's making. For instance, FHA lenders must now have their platform audited annually. That is a big request for a small bank, she says.
"The argument that banks aren't able to supply credit in rural communities is largely a function of their new rules," Andersen says. "I don't think that HUD has really thought about the consequences of some of the things it has done."
Part of bankers' ire toward the proposal is the system's overall hunger for expanding its powers. In 2007, system lenders attempted to push legislation that would have bumped the 2,500 population cap to 6,000.
The following year, the Farm Credit Administration floated a rule that would have also expanded its ability to lend in a variety of ways in larger areas. That proposal failed after several lawmakers expressed concerns over the expansion. The Farm Credit Administration also declined to comment, saying it doesn't comment on other agency's proposed rulemaking.
"The Farm Credit System has consistently shown an interest in expanding into all conceivable areas of finance in an effort to grow their businesses," says John Blanchfield, the director of the American Bankers Association's Center for Agriculture and Rural Banking.
Blanchfield found the current proposal particularly biting, given Farm Credit's status as a government-sponsored enterprise. "They already have a ginormous subsidy where they are enjoying some of the lowest cost of funds," he says.
"There is no reason that Farm Credit, flush with earnings, can't create its own housing program that would look like FHA," Blanchfield adds. "This would be a federal guarantee on top of a federal guarantee. That's just a double-government meat sandwich."
