Farmer Mac's troubled start - Federal Agricultural Mortgage Corporation; weak loan demand; market looks small; most farm operators do not qualify; includes related article about language of secondary markets - U.S. Dept. of Agriculture, Economic Research Service report

Agricultural Outlook, Dec, 1991 by Steve Koenig, Jim Ryan

Even more importantly, the proportion of new funds available for Farmer Mac pooling would be limited because many loans would fail to meet Farmers Mac's loan underwriting standards. If new lending resembles outstanding farm real estate debt, less than half of the $7 billion loaned in 1988 would have qualified for pooling under Farmer Mac's loan under-writing standards.

Most Farm Operators

Don't Qualify

Analysis of USDA's Farm Costs and Returns Survey (FCRS) shows that at the end of 1989, only a fraction of farm operators met Farmer Mac underwriting standards. Only half of farm operators owe any debt, and of those that do, less than a third are estimated to meet Farmer Mac underwriting standards.

Farmer Mac applies seven loan under-writing standards that farmers must meet to be eligible for the market. Several of the standards involve balance sheet liquidity, financial solvency, profitability, collateral requirements, and debt servicing ability.

Farmer Mac guidelines identify specific financial ratios for applying these five standards. The ratios with the greatest influence on eligibility are liquidity and debt-servicing ability - poor performance in these two areas severely limits eligibility. Analysis of the 1989 data indicates only about half of farm operators with debt meet Farmer Mac's specified ratios assessing liquidity or debt servicing.

Other standards cover creditworthiness and loan terms and conditions. Although the analysis did not apply these standards to determine the number of eligible operators, it is likely that application of these standards would further reduce the number of eligible farm operators, as well as the value of outstanding debt eligible for the secondary market.

The relatively high creditworthiness needed by qualifying borrowers also suggests that even if the market had been operational sooner, it would have had little effect on easing financial stress among farmers who most needed help. Benefits from an operating Farmer Mac market would accrue primarily to the most creditworthy farmers. But these farmers already receive the most competitive loan interest rates and terms.

Based on FRCS estimates, as little as 20 percent, or $8.5 billion, of the farm real estate debt owed by farm operators would qualify for sale in 1989. As much as $3 billion of this debt was owed to lenders unqualified to originate loans for the market. FCRS excludes debt associated with landlords and nonoperators, since the FCRS provides estimates only for farm operators. But nonoperators hold less than 15 percent of farm real estate debt.

Because much of the outstanding debt would not qualify for the Farmer Mac market, the volume available to poolers is substantially limited. And of the volume that does qualify, most would have to be rewritten in order to meet Farmer Mac's loan documentation requirements. Redocumentation not only requires borrower consent, but can also be costly.

Bankers & Poolers

Reluctant

Following initial enthusiasm, commercial bank interest in Farmer Mac has waned. One reason is that banks specializing in farm lending - the agricultural banks - now hold fewer loans than normally. Loan-to-deposit ratios for agricultural banks, a common measure of a bank's liquidity, averaged 0.55 in early 1991, far below the 0.65-0.70 range that these bankers consider desirable. Since agricultural banks have low loan-to-deposit ratios, they have little need to sell loans to raise the liquidity of their portfolios.