Farmer Mac:

Revised Charter Enhances Secondary Market Activity, but Growth Depends on Various Factors

GGD-99-85: Published: May 21, 1999. Publicly Released: Jun 9, 1999.

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William B. Shear
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Pursuant to a congressional request, GAO reviewed the progress that the Federal Agricultural Mortgage Corporation (Farmer Mac) has made in achieving its statutory mission and examined its future viability, focusing on: (1) actions taken by Farmer Mac to promote the development of a secondary market, including the introduction of new programs and products; the standardization of loan processes, including loan documents and underwriting standards; and the use of risk management techniques to facilitate safe and sound secondary market activities; and (2) Farmer Mac's future viability and the potential benefits and costs of a government-sponsored secondary market for agricultural mortgages.

GAO noted that: (1) in an attempt to make the secondary market in agricultural mortgages an attractive alternative for lenders, Farmer Mac has: (a) used its enhanced charter authorities to develop new programs and products and streamlined the process for buying loans; (b) standardized certain aspects of the loan processes, such as underwriting; and (c) developed risk management techniques to facilitate safe and sound secondary market activities; (2) while these efforts have increased secondary market activity, Farmer Mac's share of the overall agricultural mortgage market remains small, about 1.2 percent; (3) since its 1996 restructuring, Farmer Mac has introduced programs to directly purchase agricultural mortgages from lenders and to exchange agricultural mortgage-backed securities for mortgage loans held by lenders; (4) Farmer Mac also recently introduced a program (called AgVantage) through which it provides to agricultural lenders loans that are based on agricultural mortgage collateral; (5) Farmer Mac has standardized some aspects of secondary market transactions by requiring participating lenders to attest that their loans meet Farmer Mac underwriting standards; (6) Farmer Mac has not developed standardized loan documents because it believes the cost would be prohibitive given the state-by-state variability of laws governing agricultural mortgages; (7) Farmer Mac purchased futures and options to help manage the interest-rate risk of those loans it held in its portfolio, and its risk management techniques appeared to be generally consistent with industry risk management principles; (8) it appears that Farmer Mac could continue to be viable if: (a) its recent rate of expansion is maintained; (b) it continues to experience rates of return that are comparable to current levels; and (c) economic conditions in the national and agricultural economies remain stable; (9) events such as a less favorable interest-rate environment or declines in the credit quality of agricultural mortgages could reduce Farmer Mac's future profitability; (10) one important determinant of the net benefits generated by Farmer Mac is the extent to which its activities compete with or complement those of other government sponsored enterprises (GSE); and (11) because there is potential for mission overlap among Farmer Mac, Farm Credit System (FCS), and the Federal Home Loan Bank (FHLBank) System, new or expanded activities by one of these entities can affect the benefits generated by the other two.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: On February 26, 2001, the Senate Agriculture committee held a hearing at which the competitive convergence between the FLBank System and the Farm Credit System were discussed.

    Matter: Farmer Mac, FCS, and FHLBanks now offer programs that compete directly and indirectly with one another. Therefore, the public benefits and costs of these three GSEs are interrelated. Congressional committees with jurisdiction may want to consider interactions among the activities and the charters of these three GSEs as part of their ongoing oversight.


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