Farmer Mac to Buy Loan Pools as Market Spur

WASHINGTON -- The Federal Agricultural Mortgage Corp. is seeking to stimulate the secondary market for farm loans by buying loan-backed securities itself and funding the purchases by issuing debt.

Previously, the agency known as Farmer Mac wanted poolers of loans to market the unfamiliar brand of mortgage-backed securities to the public. Agency officials outlined the strategy change Tuesday at the corporation's third annual shareholders meeting.

The approach is not what Farmer Mac architects envisioned when Congress authorized establishment of a secondary-market agency for farm loans in 1987.

Regulatory Approval Sought

But Farmer Mac officials believe they have the authority to buy securities for their portfolio. Claiming this is a crucial step toward creating an active market for farm-mortgage securities, they are seeking a go-ahead from their regulator, the Farm Credit Administration.

Despite promotional efforts by farm-loan poolers, investors remain wary. Because agricultural loans lack uniformity, little information exists on prepayment rates and other factors that affect the pricing of securities. As a result, prospective investors have indicated they would want high rates of return.

2 Poolers Certified

By stepping up to buy the first securities, Farmer Mac hopes to encourage lenders to make low-cost farm loans that conform with its pooling guidelines. Farmer Mac would function as the secondary market until poolers gain enough experience with the loans to persuade investors to take the securities at lower prices.

Currently, the Manufacturers Hanover Securities Corp. unit of Manufacturers Hanover Corp. and the Goldman Sachs Mortgage Co. subsidiary of Goldman, Sachs & Co. are certified to pool farm loans; Farmer Mac would guarantee the timely payment of principal and interest on pools of loans that they assemble.

"A very intensive effort has been made by poolers and originators to start the secondary mortgage market for farm loans by issuing mortgage-backed securities," said Farmer Mac spokesman Thomas R. Clark. "But despite their efforts, they don't see it starting on that basis in the near future."

As a government-chartered entity, Farmer Mac can borrow cheaply in the capital markets. Last month, its first-ever debt issue - $50 million of 91-day discount notes - carried a bond-equivalent yield of 5.85%.

By funding securities purchases through low-cost borrowings, Farmer Mac hopes to boost liquidity and stabilize farm-sector interest rates.

Farmer Mac president and chief executive Henry D. Edelman said he expects a number of small pools, in the range of $10 million to $25 million, to be formed fairly soon.

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