Farmer Mac strives to fulfill its statutory mission mainly by purchasing agricultural mortgages from lenders. We did not examine the impact of Farmer Mac on agricultural mortgage interest rates or the availability of agricultural mortgage credit. In an attempt to facilitate an efficient secondary market, Farmer Mac has streamlined the process for buying loans and standardized some aspects of a secondary market transaction, including underwriting guidelines, but it believes that standardized loan documents, such as those used in the secondary market for residential mortgages, would be cost prohibitive. To mitigate its exposure to risks, Farmer Mac uses risk management techniques to help it conduct secondary market activities in a safe and sound manner. Close and fund the loan. Management of interest-rate risk. Underwriting standards. However, events such as a less favorable interest-rate environment or declines in the credit quality of agricultural mortgage could reduce Farmer Mac’s future profitability. The net benefits and costs also depend on how Farmer Mac’s activities interact with those of the two other GSEs FCS and the FHLBank System. Government sponsorship of Farmer Mac has the potential, if it remains viable and continues to grow, to generate benefits through loan programs and products that help agricultural lenders manage risks. Conclusions

The share of loans in a primary market that are sold by lenders in a secondary market depends on the benefits generated by the secondary market. Farmer Mac has used its post-1996 charter authorities to streamline the process for buying loans and to develop new programs and products that have provided an alternative funding source for some agricultural lenders. Farmer Mac has also standardized some aspects of the secondary market transaction by requiring participating agricultural mortgage lenders to make representations and warranties that their loans meet Farmer Mac underwriting standards, but Farmer Mac has not standardized loan documents because state laws governing agricultural mortgage loans and agricultural lending practices vary. We noted that elements of Farmer Mac’s risk management techniques appeared to be generally consistent with industry risk management principles. Since its 1996 restructuring, Farmer Mac has made some progress in developing a secondary market in agricultural mortgages, but it currently has a relatively small market presence. It appears that Farmer Mac can be viable if it continues to expand, it experiences returns that are comparable to current levels, and economic conditions in the overall and agricultural economies of the nation remain stable. For these reasons, Farmer Mac stated that our report “contains no valid foundation for the finding that Farmer Mac’s market penetration at its early stage of development is low compared to the housing enterprises and all references to that effect should be deleted from the report.” In contrast to our conclusion, Farmer Mac stated, “…we believe the correct finding is that Farmer Mac’s 2% market penetration during its first three years of operations compares very favorably to the housing GSEs’ progress in the multifamily market, which is the more appropriate market for comparison with agricultural mortgages.”
A major point of the section in the report containing these comparisons is that Farmer Mac’s penetration of the agricultural mortgage market is relatively small. GAO Comments

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the progress that the Federal Agricultural Mortgage Corporation (Farmer Mac) has made in achieving its statutory mission and examined its future viability, focusing on: (1) actions taken by Farmer Mac to promote the development of a secondary market, including the introduction of new programs and products; the standardization of loan processes, including loan documents and underwriting standards; and the use of risk management techniques to facilitate safe and sound secondary market activities; and (2) Farmer Mac's future viability and the potential benefits and costs of a government-sponsored secondary market for agricultural mortgages.

What GAO Found

GAO noted that: (1) in an attempt to make the secondary market in agricultural mortgages an attractive alternative for lenders, Farmer Mac has: (a) used its enhanced charter authorities to develop new programs and products and streamlined the process for buying loans; (b) standardized certain aspects of the loan processes, such as underwriting; and (c) developed risk management techniques to facilitate safe and sound secondary market activities; (2) while these efforts have increased secondary market activity, Farmer Mac's share of the overall agricultural mortgage market remains small, about 1.2 percent; (3) since its 1996 restructuring, Farmer Mac has introduced programs to directly purchase agricultural mortgages from lenders and to exchange agricultural mortgage-backed securities for mortgage loans held by lenders; (4) Farmer Mac also recently introduced a program (called AgVantage) through which it provides to agricultural lenders loans that are based on agricultural mortgage collateral; (5) Farmer Mac has standardized some aspects of secondary market transactions by requiring participating lenders to attest that their loans meet Farmer Mac underwriting standards; (6) Farmer Mac has not developed standardized loan documents because it believes the cost would be prohibitive given the state-by-state variability of laws governing agricultural mortgages; (7) Farmer Mac purchased futures and options to help manage the interest-rate risk of those loans it held in its portfolio, and its risk management techniques appeared to be generally consistent with industry risk management principles; (8) it appears that Farmer Mac could continue to be viable if: (a) its recent rate of expansion is maintained; (b) it continues to experience rates of return that are comparable to current levels; and (c) economic conditions in the national and agricultural economies remain stable; (9) events such as a less favorable interest-rate environment or declines in the credit quality of agricultural mortgages could reduce Farmer Mac's future profitability; (10) one important determinant of the net benefits generated by Farmer Mac is the extent to which its activities compete with or complement those of other government sponsored enterprises (GSE); and (11) because there is potential for mission overlap among Farmer Mac, Farm Credit System (FCS), and the Federal Home Loan Bank (FHLBank) System, new or expanded activities by one of these entities can affect the benefits generated by the other two.