The Federal Agricultural Mortgage Corporation, commonly known as Farmer Mac, is a United States government-sponsored enterprise (GSE) that provides a secondary market for agricultural real estate and rural housing mortgages. Its aim is to increase the availability of long-term credit at stable interest rates for America’s farmers, ranchers, and rural homeowners.
History of Farmer Mac
Farmer Mac was established in 1987 under the Agricultural Credit Act during a period when smaller banks were struggling to provide adequate financing for agricultural enterprises due to the agricultural economic crisis of the 1980s. This Act intended to protect the agricultural community by improving the availability of long-term funding.
Functions of Farmer Mac
Secondary Market
Farmer Mac operates as a secondary market, purchasing eligible loans from agricultural lenders, securing them into mortgage-backed securities (MBS), and selling these securities to investors. This process provides lenders with liquidity, allowing them to make more loans.
- Loan Purchases: Farmer Mac buys agricultural loans from lenders.
- Securitization: These loans are pooled together and transformed into MBS.
- Sales: The MBS are then sold to investors, thereby freeing up capital for additional agricultural loans.
Loan Guarantees
Farmer Mac also offers loan guarantees, ensuring that lenders are protected against losses on certain loans. This encourages more lending in the agricultural sector, as lenders have reduced risk exposure.
Types of Products and Services
Mortgage-Backed Securities (MBS)
These are securities composed of a bundle of agricultural or rural housing loans. Investors in MBS receive payments from the interest and principal of the loans.
Loan Purchases and Guarantees
Farmer Mac buys loans directly from certified lenders and offers guarantees to reduce the risk associated with agricultural lending.
Special Considerations
Regulatory Oversight
Farmer Mac is regulated by the Farm Credit Administration (FCA), ensuring it operates within the guidelines designed to maintain stability and security within the agricultural mortgage sector.
Impact on Agricultural Finance
The presence of Farmer Mac provides a crucial safety net and liquidity source for agricultural lenders, effectively supporting the agricultural economy by ensuring that farmers and ranchers have access to necessary funds at stable interest rates.
Historical Context
During the agricultural economic crisis of the 1980s, many small agricultural lenders faced insolvency due to high default rates on loans. The creation of Farmer Mac helped stabilize this crucial sector by providing a reliable secondary market for agricultural loans.
Applicability and Comparisons
Government-Sponsored Enterprises (GSEs)
Farmer Mac is often compared to other GSEs such as Fannie Mae and Freddie Mac, which support the residential mortgage market. Unlike these entities, Farmer Mac specifically caters to the agricultural and rural sectors.
Related Terms
- Mortgage-Backed Security (MBS): A type of asset-backed security that is secured by a collection of mortgages.
- Government-Sponsored Enterprise (GSE): A financial services corporation created by the U.S. Congress to enhance the flow of credit to specific sectors of the economy.
- Loan Guarantee: A promise by one party to assume the debt obligation of a borrower if that borrower defaults.
FAQs
Q1: What types of loans does Farmer Mac purchase?
A1: Farmer Mac purchases loans related to agricultural real estate, rural housing, and certain utility cooperatives.
Q2: How does Farmer Mac benefit farmers?
A2: By providing a secondary market for agricultural loans, Farmer Mac ensures that lenders have more liquidity, which in turn increases the availability of credit for farmers at stable interest rates.
Q3: Is Farmer Mac a government agency?
A3: No, Farmer Mac is a government-sponsored enterprise, which means it operates with government oversight but is a publicly traded company.
References
- Farmer Mac Official Website: Farmer Mac
- Agricultural Credit Act of 1987
- U.S. Farm Credit Administration (FCA)
- “The Agricultural Economic Crisis of the 1980s and Its Effect on Farmer Mac,” Journal of Agricultural Finance, 2009.
Summary
Farmer Mac plays a vital role in the U.S. agricultural sector by providing a secondary market for agricultural loans, enhancing the liquidity and stability of agricultural finance. Through its purchasing and securitizing of loans, it supports farmers and rural communities by ensuring they have access to necessary funds at stable interest rates. Established in response to the agricultural crisis of the 1980s, Farmer Mac remains a cornerstone in the landscape of agricultural finance.
