Federal Agricultural Mortgage Corporation

1133 Twenty-First Street N.W., Suite 600
Washington, D.C. 20036
U.S.A.
Telephone: (202) 872-7700
Toll Free: (800) 879-3276
Fax: (202) 872-7713
Web site: http://www.farmermac.com

Public Company
Incorporated: 1987
Employees: 38
Total Assets: $3.84 billion (2004)
Stock Exchanges: New York
Ticker Symbol: AGM
NAIC: 522298 All Other Non-Depository Credit Intermediation

Federal Agricultural Mortgage Corporation (Farmer Mac) was chartered with the intention of creating a secondary market for agricultural real estate and rural housing mortgage loans. The Government Sponsored Enterprise (GSE) buys both conventional and government guaranteed loans, then packages and sells them to investors as securities to encourage the flow of funds through the mortgage system. Farmer Mac moved at a crawl during nearly all of its first decade of existence, reaping hordes of critics. Following the lifting of restrictions on its terms of operation in 1996, the agency moved into profitability but faced a new round of scrutiny.

Farm Crisis Prompting Creation of New GSE: 1987–95

The Federal Agricultural Mortgage Corporation (Farmer Mac) was created to bring some relief to the struggling U.S. farm economy through a secondary market for agricultural and rural housing loans. American farmers were losing their land to high interest rates and wanted long-term fixed-rate agricultural loans.

The government sponsored enterprise (GSE) was more than a half decade in the making, according to a 1989 ABA Banking Journal article, finally being realized in January 1988 following its authorization through the 1987 Agricultural Credit Act. Farmer Mac's first annual meeting was held on March 2, 1989. As mandated by law, the entity then had 120 days to issue operating regulations and rules. A New Yorker, Henry D. Edelman, was named president in April 1989.

As chartered, banks could not sell loans directly to Farmer Mac. Selling to a pooler, a large commercial bank or insurance company, drove up costs to the banker and in turn interest rates for farmers and ranchers. Moreover, banks had to retain the riskiest 10 percent of their loans.

Subsequently, Farmer Mac's harvest was less than abundant during its first few years of operation. "The agency has yet to assemble a single pool of loans or guarantee a security under its flagship program," wrote Debra Cope for American Banker in November 1991. Company stockholders, including banks, insurance companies, and Farm Credit Banks, waited for a return on their $23 million investment. The money-losing agency's six employees, meanwhile, received a total of $1.3 million in salaries, bonuses, and benefits during 1990.

President and CEO Henry D. Edelman, a former PaineWebber investment banker, remained optimistic about the future. He pointed to Fannie Mae and Freddie Mac, drivers of the secondary market for home loans, telling American Banker they, too, were slow to develop.

Others had their doubts, including J. Ken Goodmiller, a General Accounting Office (GAO) manager, who told American Banker lenders were hanging on to their farm mortgages instead of selling them to poolers ready to assemble loans into guaranteed securities for Farmer Mac.

Many commercial bankers, benefiting from a shift in economic conditions, viewed the program as a backup plan for creating liquidity. Furthermore, the farm real estate market had shrunk from its 1987 level of $87.7 billion of debt outstanding to $78.4 billion at year-end 1990. Less than $27.1 billion of the 1990 farm property debt even qualified for the Farmer Mac program.

For its part, Farmer Mac planned to issue debt and buy the loan-backed securities in hope of creating some momentum for the secondary market for farm loans. Farmer Mac's regulator, the Farm Credit Administration, and the GAO questioned the GSE's authority to use debt in this way.

By the end of 1991, Farmer Mac had issued $10 million in securities under the Farmer Mac II program. Created in 1990, following a request by the United States Department of Agriculture, the program securitized government, not commercial, farm loans. Farmer Mac's first mortgage-backed security was issued in late 1991, according to the US Banker article.

During 1991, the Farm Credit Administration's Office of Secondary Market Oversight was established as Farmer Mac's financial regulator, overseeing the agency for financial safety and soundness. Additionally, minimum regulatory capital requirements were set and its ability to purchase guaranteed securities was to be clarified.

New Rules and New Opportunities: 1996–99

Farmer Mac received some assistance in its effort to create a secondary farm loan market in 1996 legislation signed by President Clinton. The changes allowed Farmer Mac to buy loans directly from lenders and issue guaranteed securities representing 100 percent of the principal of the purchased loans. A 100 percent backing of securities by Farmer Mac enabled banks to lower their loan rates. The legislation also modified Farmer Mac's capital requirements. Farmer Mac was given two years to reach a minimum capital requirement level of $25 million.

New rules aside, according to American Banker, the GES still had to demonstrate that it could be as successful as its cousins Fannie and Freddie. Questions lingered regarding farm program oversight, loan originators, underwriting standards, and loan backing.

Among the GSEs, the multibillion-dollar operations Freddie Mac and Fannie Mae reigned supreme. Fannie Mae, established during the Depression, and Freddie Mac, formed in 1970, produced billions in profits annually while keeping the U.S. nonfarm mortgage market pumped up. By comparison, Farmer Mac had securitized less than $1 billion in farm mortgages during its entire existence, according to a late 1997 US Banker article.

The Farm Credit System Reform Act of 1996 helped lift Farmer Mac into profitability for the first time. In addition to being granted the authority to work directly with lenders, the entity could now set its own price and terms and develop new loan products, according to US Banker. The result was a regular offering of securities.

Farmer Mac recorded profits of $777,000 in 1996 versus a loss of $1.3 million in 1994. A stock offering in December 1996 brought in enough funds to carry it over current capital requirements. An expanding ag credit market also aided Farmer Mac's cause.

Looking for liquidity and a vehicle for making larger loans, ag bankers had begun to turn to Farmer Mac. "The dollar total of loans bought by the Federal Agricultural Mortgage Corp. has risen nearly 64 percent in the last two years, and the formerly money-losing corporation turned a profit in 1997 for the second consecutive year. What's more, Farmer Mac's class C stock has soared to more than $60 a share, from a low of $4.25 in 1995," Annie Sullivan reported for American Banker in January 1998.

The potential market for the enterprise was considerable: $40 billion of eligible loans. Farmer Mac had tapped into just a small percentage of that total. Besides allowing bankers to move long-term, fixed-rate ag loans off their books by selling to Farmer Mac, they could earn fees from the GSE by retaining servicing rights on the loans. Farmer Mac drew bankers to its program through workshops, direct mail, and cold calls. In 1998, Farmer Mac began holding agricultural mortgage loan-backed securities on its own books, thus increasing its business volume.

Trading on the NASDAQ, Farmer Mac applied to make the move to the New York Stock Exchange in 1999, seeking greater visibility and liquidity and less volatility for its stock. The move was made possible by an increase in volume of its loan purchases and loan guarantees plus its ongoing fees from previously guaranteed loans, according to a May 1999 National Mortgage News article. Farmer Mac and the other GSEs guaranteed timely payment of principal and interest on the mortgage-backed securities.

Low commodity prices at the time were putting pressure on farmers and ranchers, driving up delinquency rates and putting the agency at risk. But Farmer Mac said the combination of its underwriting standards and reserves would counter any possible losses.

In the Pubic Eye: 2000–05

GSEs were in the sights of some in Congress. Louisiana Republican Representative Richard H. Baker, remembering the damage the Savings and Loan crisis had inflicted on his state, attempted but failed to find support for the overhaul of the GSEs in 2000.

Farmer Mac recorded $17.1 million in operating income in 2001, up from the 2000 level of $10.4 million. The company also reported record earnings gains. President and CEO Henry Edelman said the gains were made in spite of volatile interest rates, a stressed ag economy, and a nationwide recession. Outstanding guarantees at year-end of $4.2 billion topped 2000 by $1.1 billion. Farmer Mac held almost $1.9 billion of loans in its portfolio. Past due loans were also up among those made after 1996, when Farmer Mac began holding 100 percent of the credit risk.

Company Perspectives:

Farmer Mac accomplishes its public policy mission primarily by purchasing, or committing to purchase, qualified loans from agricultural mortgage lenders, thereby replenishing their source of funds to make new loans.

Edelman's salary and stock options for 2001 approached an estimated $1.8 million, according to an April 2002 article in the New York Times. He controlled $27.6 million in stock: an additional $2.8 million had been sold since the summer of 2001. The board of directors had begun awarding themselves stock options in 1997 and accumulated an average holding of $816,249. Insiders held 13 percent of the company via stock options and restricted stock grants. That figure could be expected to rise to 35 percent based on the number of additional shares available to insiders.

As a GSE Farmer Mac received some advantages over the general marketplace, an exemption from most state and local taxes and an interest rate break on borrowed money. The company used its money borrowing capacity to give the secondary market a jumpstart, but the risks Farmer Mac assumed elevated over time, Cowan reported.

Farmer Mac had yet to develop a thriving secondary market for ag loans, holding more mortgage-backed securities in its portfolio than it had sold. But its earnings growth drew the interest of investors in its stock.

With its securities sales weak, Farmer Mac had turned to other endeavors, including ag loans to part-time and hobby farmers and guarantees on loans retained by banks. Some of the biggest customers for that product were companies with connections to the Farmer Mac board, according to the New York Times.

In June 2002, a bipartisan call by members of the Senate Agriculture Committee arose for the GAO to look into Farmer Mac's financial stability, independence of its directors, compensation of insiders, and performance of its mission. Farmer Mac shares fell in response to the questions regarding its business practices. One concern facing the GSE was the level of business it engaged in with other government farm credit institutions. In effect loan risks were being shifted from one federal agency to another.

In July 2004, Farmer Mac's stock slid again with the news that its federal regulator proposed rules eliminating its competitive advantage over commercial banks or thrifts. Under the changes, the agency would be required to seek a formal rating from a credit agency, thus driving up its cost of borrowing money. The GSE would have to set aside more capital to cover its obligations. Farmer Mac later announced that it would get a credit rating regardless of the outcome of the proposal. For the entire year, Farmer Mac's volume fell, but so did the level of past due loans. Net income and stockholder equity, on the other hand, climbed.

Principal Competitors

Citigroup Inc.; Washington Mutual, Inc.; Wells Fargo & Company.

Key Dates:

1987:

Agricultural Credit Act of 1987 creates the Federal Agricultural Mortgage Corporation (Farmer Mac).

1990:

Farmer Mac II program is established.

1991:

New oversight and capital requirements are set.

1996:

Farmer Mac receives more flexibility in operating structure and records first profits.

1988:

Company begins holding agricultural mortgage backed securities.

1999:

Farmer Mac applies for listing on New York Stock Exchange.

2002:

Congress announces call for scrutiny of Farmer Mac.

2004:

Farmer Mac declares it will seek a formal rating from a credit agency.

Further Reading

Cope, Debra, "A Life Struggle Looms in '92 for Farmer Mac," American Banker, November 6, 1991, pp. 1+.

Cornwell, Ted, "Farmer Mac Reports Record 2001," National Mortgage News, February 18, 2002.

Cowan, Alison Leigh, "Big-City Paydays at 'Farmer Mac,'" New York Times, April 28, 2002, p. BU1.

――――, "A Bipartisan Call in Congress for Scrutiny of Farmer Mac," New York Times, June 27, 2002, p. C9.

――――, "One Man Stands Watch on Billions in Farm Loans," New York Times, June 20, 2002, p. C1.

"Farmer Mac Seeks NYSE Listing," National Mortgage News, May 10, 1999.

Fogarty, Mark, "Farmer Mac Gets Boost," US Banker, November 1997, pp. 81+.

Jackson, Ben, "GSE Rejects Claims of Straying from Mission," American Banker, September 10, 2002.

Naylor, Frank W., "Farmer Mac Gets Ready to Roll," ABA Banking Journal, May 1989, pp. 73+.

O'Hara, Terence, "Proposal Hurts Farmer Mac Shares," Washington Post, July 30, 2004, p. E1.

Richard, Christine, "Farmer Mac Seeks First Credit Rating," Wall Street Journal, October 13, 2004, p. 1.

Sullivan, Annie, "Gaining Acceptance by Ag Bankers, Farmer Mac Plows Deeper into Black," American Banker, January 5, 1998, pp. 1+.

Talley, Karen, "Law Gives Farmer Mac a Boost in Securitizing, but Hurdles Remain," American Banker, February 28, 1996, p. 18.