The Federal Agricultural Mortgage Corporation (Farmer Mac) has set a record year for volume upon the completion of two major transactions last week. The company is also generating increased market support as it looks toward another record year in 2000.
Farmer Mac, for the first time, has purchases and guarantees of agricultural mortgage-backed securities totaling more than $1 billion for 1999. Its most recent transactions included a swap transaction in mid-October of $103 million in loans, and a $155 million long-term standby commitment of loans owed by the AgStar Agricultural Credit Association. About two-thirds of Farmer Mac's total mortgage purchases for 1999 were either swap or long-term standby commitment transactions.
Henry Edelman, president and CEO of Farmer Mac, said that he hopes to surpass this mark next year, given that this year was not the best year for agriculture. "Unquestionably, 1999 has been a tough year for agriculture," he said. "It's been mitigated somewhat by federal government need programs, but nevertheless, it has been a tough year for ag and ag lenders. We think that the year 2000 has promises of being a better year."
He added that trends in agriculture such as the generational transfer of land, and the transfer of land from one farmer to another, would all require financing. That, and a growing acceptance of the Farmer Mac techniques of swaps, long-term standbys and outright sales by lenders, should continue well into the next year, but it will be a challenge educating those lenders about Farmer Mac's message.
A Niche Market
While Farmer Mac has had a government charter since 1988, provisions in that charter made it difficult for the enterprise to operate. But when the requirements of first-loss exposure (external to the company) and external poolers were eliminated in 1996, it changed the entire nature of Farmer Mac's business, Edelman said. Since 1996, growth in the company has been dramatic, with revenue growing at approximately 30% year-over-year.
But the agricultural MBS market still represents just a fraction of the overall residential MBS market. Edelman credits this in part to the overall large size of the residential MBS market, and in part to the fact that Farmer Mac is the only government-sponsored guarantor of agricultural mortgage-backed securities. "So as we grow, so the market grows," he said. "It's still a very small percentage of the residential market."
The market may be small, but Edelman believes that agricultural MBS are highly attractive to investors because of the way they react in the market.
These securitized mortgages, which Edelman says are of "very high quality," often have slower prepayment speeds because agricultural mortgages have "economic disincentives" that do not exist in conventional residential mortgages. Also these mortgages, which are typically balloons, have semi-annual payments, making them react similarly to bonds in terms of payment streams.
"To think about slower prepay, semi-annual pay and balloons, they begin to look a lot more like bonds than fully advertising mortgages in terms of cashflow profiles of residential mortgages," Edelman said. "So we think there's a distinct attractiveness about agricultural mortgage-backed securities, which should be marketed to investors, which should aim [toward] the acceptance of these securities." Typical loans in Farmer Mac's pools average $450,000-$500,000, when the entire volume is averaged.
But Growing, Nevertheless
Farmer Mac currently deals with a nationwide network of cooperative agricultural lenders, known as the Farm Credit System. The system is borrower-owned, and focuses on agriculture-related mortgages, non-mortgage production, equipment and operating loans.
Also, commercial banks are beginning to originate agricultural mortgages as well. These are ranging from small community banks to major commercials like Wells Fargo and Bank One. Furthermore, insurance companies are making agricultural loans available, and some recently formed mortgage banking operations are focusing on agriculture. "So we think that we're getting a pretty diversified delivery system in place, and it's expanding," said Edelman, adding that agricultural MBS are also gaining an appeal among investors.
The reason Edelman believes these loans are important is because they represent the long-term value of agricultural land in the United States. Edelman has confidence in that value and in the farmers and ranchers who work on that land. "I think Farmer Mac has an excellent future," he said.