Secondary markets for financing farm real estate are still a relatively new concept for agriculture. Consumers have had access to these markets for over 40 years through Fannie Mae and Gennie Mae. Farmer Mac is nothing more than the agricultural counterpart to these two agencies.
Farmer Mac was created by Congress in 1987. We had just come through a period of very high interest rates that was devastating to the farm community. The timing was right to develop a source of long term farm real estate financing. Most farm real estate mortgages in the 80’s were funded by bank deposits. Banks were and are unwilling to take the risk, that they lock in an interest rate for 5 or 10 years, because the cost of their deposits were and are short term. As a bank you cannot lock in intermediate or long term rates unless you have deposits of similar fixed rate periods to match against these loans. The result has been that bank’s have kept the fixed rate periods short on these types of loans, and passed on the interest rate risk to their farm customers. They have for the most part said, “we are unwilling to take the interest rate risk so we will pass that risk on to our farmers”. If your banker is unwilling to take that risk, doesn’t it make sense that farmers should also minimize that risk? The intent of Farmer Mac is to help farmers minimize that risk.
There are two major Farmer Mac programs that we deal with: One is Farmer Mac I. The other is Farmer Mac II. The differences between the two programs are:
FARMER MAC I
This program is intended for stronger balance sheet farmers with relatively strong repayment ability. The basic underwriting standards are:
1. Less than 50% Debt to Asset Ratio.
2. Maximum Loan to Value of 70%.
3. Minimum Debt Service Ability of 1.25.
4. Minimum Current Ratio of 1:1.
5. Typical Cash Rent In Area Must Cover Principal, Interest, and Real Estate Taxes.
FARMER MAC II
This program is only applicable to guaranteed Farm Service Agency loans. The money is borrowed from a bank. The bank receives a 90% guarantee from F.S.A. against loss on the loan. The 90% guaranteed portion is saleable to Farmer Mac II. The basic underwriting standards compared to Farmer Mac I standards are:
1. No Debt to Asset Requirement
2. Maximum Loan to Value of 100%--75% is standard.
3. Minimum Debt Service Ability of 1.00:1.00.
4. No Minimum Current Ratio
5. No Requirement That Cash Rent Cover P & I and Real Estate Taxes.
Both Farmer Mac I and Farmer Mac II are viable programs.