Federal Agricultural Mortgage Corporation:

Potential Role in the Delivery of Credit for Rural Housing

RCED-91-180: Published: Aug 7, 1991. Publicly Released: Aug 7, 1991.

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John W. Harman
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Pursuant to a congressional request, GAO provided information on the: (1) Federal Agricultural Mortgage Corporation's (Farmer Mac) actions to establish a secondary market for rural housing loans, including the development of standards to govern the quality of those loans; (2) Farmer Mac's potential role in facilitating the delivery of credit for rural housing; and (3) barriers Farmer Mac may face in facilitating the delivery of credit for rural housing.

GAO found that: (1) Farmer Mac has taken the necessary steps to sponsor a secondary market for rural housing loans, including developing credit underwriting, repayment, and security appraisal standards to qualify loans for the rural housing portion of Farmer Mac I, but it has not yet guaranteed any securities backed by pools of loans; (2) Farmer Mac's potential role in facilitating delivery of rural housing credit depends upon its ability to compete with existing credit alternatives; (3) Farmer Mac's legislative restriction to rural areas could allow rural lenders and the Farm Credit System institutions better access to the home mortgage secondary market than is now available; and (4) Farmer Mac has misinterpreted its property value limit to be $200,000, which is not consistent with its authorizing legislation. GAO also found that problematic issues that could affect Farmer Mac's ability to sponsor a secondary market to rural lenders include: (1) an unknown loan volume, which could make it difficult for poolers to justify a continued commitment to the program; (2) uncertainty about the pricing of both the original mortgage and the securities sold in the secondary market; (3) the administrative burden for originators participating in a secondary market; (4) the potential inability of poolers to form networks of lenders to meet a legislative requirement for geographically diverse loan pools; and (5) regulatory requirements lenders will have to meet if they choose to retain a subordinated participation interest in the loan or in the related pool of loans.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Farmer Mac has changed its position. It will no longer accept loans that exceed $100,000 without further clarification of its authority to do so.

    Matter: In view of Farmer Mac's continuing position that it will accept loans for properties that exceed the $100,000 limit, Congress, through its oversight process, may wish to take measures to ensure that Farmer Mac will adhere to the limit. Alternatively, Congress may wish to consider authorizing a higher limit and direct Farmer Mac to establish region-specific loan caps within this higher limit to accommodate varying housing costs nationwide and to ensure that only moderately priced properties are included in Farmer Mac I pools.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: Farmer Mac stated that loans for rural housing in excess of the $100,000 limitation, as interpreted by GAO, will not be accepted as qualified for pooling by Farmer Mac without clarification of the matter by Congress, an appropriate federal agency, or in the courts.

    Recommendation: The President and Chief Executive Officer of Farmer Mac should accept only eligible loans for properties that have a purchase price of no more than $100,000 (adjusted for inflation) to be consistent with its authorizing legislation. If Farmer Mac believes that the $100,000 limit on the purchase price of rural housing prevents eligible borrowers in certain high-cost areas from participating in Farmer Mac I, it should prepare a justification for increasing the limit and seek authorization from Congress to do so.

    Agency Affected: Federal Agricultural Mortgage Corporation (Farmer Mac)


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