WE’RE HEARING the farm lending niche (and the majority of it is real estate finance) is booming, and that’s a good thing in and of itself. However, a farm bust is a thing to take special steps to be avoided.
There was an enormous farm bust 30 years ago, long enough ago that many of the current farm lenders may not remember it. But it was awful. Commodity prices crumpled and foreclosures boomed. You had the really awful practice of lenders calling loans due on farmers who were still current on their payments (but were projected to default because their income would crater). Lots of farm banks failed as well as the farmers.
The farm crash even dented the popular culture, with the annual Farm Aid concerts played to raise money for broke farmers, and impassioned protest songs like John Mellencamp’s “Rain On the Scarecrow” or movies like “Country” starring Sam Shepard and Jessica Lange. We don’t want to see and hear this kind of thing again.
So we get just the slightest bit nervous when we see stats like the ones showing ag lending up 14% for 2012, or a
Strong commodity prices support rises in value of farmland, and that’s a trend that may continue. An uptick in the general economy, as many are expecting in the next several years, would help sustain farm lending as well.
Farm mortgages aren’t much like residential mortgages. For one, the value of the land is generally higher than the value of the improvements. Real estate loans are paired with production loans (equipment, etc.) though in recent years RE lending has gotten stronger.
Farm loans are made by farm banks (2,215 of them, according to the American Bankers Association), insurance firms, and the Farm Credit System, a GSE consisting of local lenders that do not take deposits (they get their lending money from debt sales by their parent).
This is a system that has worked well in recent years, especially with the development of a secondary market by Farmer Mac, a small cousin of Fannie Mae and Freddie Mac. But with the enormous mess that resulted from the last real estate bubble popping, it makes sense to keep an eye on this small ($150 billion, according to USDA) but important niche.
PUSH BACK: Last week’s “What We’re Hearing” column has gotten some push back from the American Bankers Association.
It seems the ABA has taken the time to read the Bipartisan Housing Commission report. On pages 56-58, the commission spells out how the new public guarantor will assure full and equal secondary market access for all lenders—big and small.
The new public guarantor that would replace Fannie Mae and Freddie Mac will set the ground rules for the new secondary mortgage market.
“The public guarantor must ensure that issuers of securities do not create barriers using different guarantee-fee pricing or other means to unfairly restrict or disadvantage participation in the government-guaranteed second market,” BHC reports says.
That is all well and good. But lenders still have to be MBS issuers to have full access to the new secondary market envisioned by the commission that was co-chaired by former HUD secretaries Mel Martinez and Henry Cisneros and former Sens. Kit Bond and George Mitchell.
That means many small lenders will have sell their loans to MBS issuers or hold them in portfolio.
Currently, they can sell to Fannie and Freddie on a loan-by-loan basis and retain the servicing. Under the new system, they may have to sell the servicing. Then their customers would be tagged and herded into big servicing mills.
That may be why some small lender groups are a little wary of the BHC proposals. They like the current system. Is it going to get any better under the new one?
MOST EMAILED: The most emailed content this week on our site was Evan Nemeroff’s report on the sale to Quicken Loans of
BRAIN TEASER: Ever play MadLibs with your kids? Lots of fun, substituting words for each other so the final result is a hodgepodge of hilarity. Well, Viner Gaping Spider has posted a MadLib up at
HAPPY HOLY DAYS: The celebrations of Passover and Easter are among the most important holy days of the year for their respective religions. We’d like to wish all our readers a happy and contemplative holy season.
Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.
