Altus, Okla., vice president Deryl Hunter generally turns to Farmer Mac for the funds. Mr. Hunter and his $150 million-asset bank are part of a growing trend. Assets at Farmer Mac - the Federal Agricultural Mortgage Corp. - have increased fourfold since 1996, to $2.6 billion. More and more bankers like Mr. Hunter find they can use the program to offer their customers competitive rates and earn fee income for themselves. "It's invisible to the borrower; they don't even realize the loan is from Farmer Mac," Mr. Hunter says. "Farmers come to us for the loan because they know us and trust us. But given our size, we couldn't give them a long-term, fixed- rate loan. Farmer Mac fixes that by taking the risk out of our operation." Farmer Mac works for farmers much like its larger and better-known government-sponsored siblings, Fannie Mae and Freddie Mac, work for ordinary homebuyers. Farm borrowers, who might want to buy new land or consolidate operating debt by using their existing real estate as collateral, turn to their local lending institution. The bank, thrift, or mortgage lender processes the credit paperwork, seeks appraisal information, and studies title insurance documents much as they would for other loans. But rather than approving or denying credit for the farmer, the financial institution forwards the required information to Farmer Mac. If Farmer Mac signs off, banks can sell the loan to the government-backed organization once the deal closes. "It's a fairly straightforward process," says Tom Clark, a Farmer Mac spokesman. "But without Farmer Mac or another funding source, most community banks would be unable to lend for more than three or five years at a fixed interest rate." Many small community banks cannot afford the risk of putting 15-year, fixed- rate loans similar to those available from Farmer Mac on their own books because the bulk of their funds is generated through short-term deposits, Mr. Clark says. But Farmer Mac can generate funds by securitizing the loans and selling long-term bonds. "It's a great way for smaller banks to leverage themselves," says Mark Hotvedt, an independent financial services consultant in Mabel, Minn. "Farmer Mac works as a tool for banks to develop a long-term borrowing relationship with their customers as opposed to those customers' going to a competitor who offers long-term fixed-rate products." To initiate Farmer Mac loans, community banks have two options: selling directly to the government-backed company or originating loans for a larger correspondent bank. To become direct sellers in Farmer Mac's flagship program, banks must apply to Farmer Mac and meet a number of insurance and equity requirements.

If they are approved, banks must buy between 100 and 2,000 shares of Farmer Mac stock, depending on their size. In early October, Farmer Mac shares were selling for about $15.50. By going this route, banks gain additional ways to fund loans besides direct loan sales. The 400 banks now qualified with Farmer Mac can swap loans for mortgage-backed securities or use a program called AgVantage to issue and sell their own bonds to Farmer Mac. AgVantage allows the bank to keep the loans on its books while gaining immediate cash from Farmer Mac. However, direct selling remains the most popular method because it removes all the risks associated with interest rate fluctuations. "Which direction banks go depends on their individual needs and capital challenges at the time," said Mary Maloney, Farmer Mac's marketing director. "They can tailor it to whether they need to grow capital or address credit and interest-rate risks." Though any bank can apply, most small community banks prefer to originate loans for a larger institution as part of a correspondent network. The largest Farmer Mac originator, Zions Agricultural Finance of Ames, Iowa, works with a network of 30 correspondent banks and 45 mortgage lenders. Zions is a division of Salt Lake City-based Zions First National Bank, a $6.5 billion- asset bank. "The correspondent program allows banks to get a flavor of the secondary market without going through Farmer Mac's direct-seller requirements," said Stephen Burrier, vice president and director of sales and marketing at Zions Agricultural Finance. "Some of these smaller rural banks may be reluctant to go through that process because they might only do one or two Farmer Mac loans a year." Whichever route banks choose, they earn money through Farmer Mac loans in a similar fashion. Banks typically charge a 1% to 2% origination fee, depending on competition in the local market. After the loans are sold to Farmer Mac, the local bank continues to earn up to 1% of the loan per year for local servicing, which involves monitoring that real-estate taxes have been paid, doing an annual property inspection, and obtaining the farm's financial information. "The servicing lets us keep the relationship with the local customer," Mr. Hunter said. "It also provides us with fee income without having to take on a long-term interest-rate risk that we would have if we funded the loan ourselves. It works out well."

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