It's nice to know there's one sector of the mortgage business that's hot. In fact, it may be overheating (does anyone want to say bubble?).
It's the agricultural mortgage sector. Now, before you dismiss this niche as insignificant, the Economic Research Service unit of the U.S. Department of Agriculture is forecasting farm mortgage debt to hit $139.4 billion this year, up a hefty 5.4% from 2011.
"If the 2012 forecasts are accurate, farm real estate debt will have increased by 3.5% since 2008 while land values will have increased 23.5%," according to ERS.
A 23.5% increase in values, while the national home value average has plummeted by 30%, looks quite spectacular here.
"Farm operators appear willing to pay up to maximum values for land based on expected profits accruing from the land's best use," ERS says.
Farm mortgages are a different animal than residential mortgages. For one thing, the value of the land is often far greater than the improvements on it. For another, individual crops can give the lending its own tinge depending on the characteristics.
Who makes farm mortgages? The two biggest groups have been tussling for dominance for years. That's commercial banks and Farm Credit System lenders. Life insurance firms are also in the business, and Farmer Mac provides a secondary market for farm mortgages.
FCS lenders are an interesting group of about 90 specialized lenders. They lend but do not take deposits, getting their lending money through debt raised by a unit of their parent, the Farm Credit Administration. They have district banks as well, like the Fed and the Federal Home Loan Banks, but these have been consolidating over the years and there are only a few left. FCA, by the way, is the oldest government-sponsored enterprise, dating back to 1916.
The American Bankers Association reports farm RE and production lending (the two are roughly equal in volume) at farm banks increased 4.9% in 2010 to $60 billion.
Not the entire picture is rosy, though—ABA reports nonperforming real estate loans at farm banks rose by 25.6% in 2010, and a sobering 80% jump a year earlier.
And FDIC chair Sheila Bair has said the steep rise in farmland prices "creates the potential for an agricultural credit problem sometime down the road."
